October 2016

Do Mortgage Subsidies Help or Hurt Borrowers?

David E. Rappoport


Mortgage subsidies affect homeownership costs by reducing effective mortgage rates and increasing house prices. I show analytically the role of mortgage subsidies in determining house price changes, economic incidence, and efficiency costs using a theoretical framework for applied welfare analysis. I derive simple expressions for these effects, as functions of reduced-form sufficient statistics, which I use to measure the effects from eliminating mortgage deductions. My main results characterize the distributional impact of mortgage subsidies among buyers and owners and how house price responses attenuate efficiency losses. My results provide broader methodological insights into the welfare analysis of credit policies.

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Accessible materials (.zip)

Keywords: MID, Public economics, house prices, incidence, mortgage interest deductions, mortgage subsidies, optimal taxation

DOI: https://doi.org/10.17016/FEDS.2016.081

PDF: Full Paper

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Last Update: June 19, 2020