Studies on Owner-Occupied Housing, Taxation and Portfolio Choice

Housing is a necessity and an important part of household welfare. For this reason, a number of different subsidies and government regulations have been implemented with the aim of ensuring a reasonable housing standard for all households. This thesis is concerned with one of the most notable features of the Finnish housing subsidy system which is the promotion of homeownership through tax subsidies, i.e. indirectly through tax law. The thesis consists of four chapters. The first chapter serves as an introductory background for chapters 2–4 which constitute the main contribution of the thesis. These chapters include three individual empirical studies that address owner-occupied housing and its tax-treatment from different points of view. The introductory chapter starts with a short overview of recent Finnish housing market developments and housing policy. Then it discusses the basic aspects of households’ tenure choice concentrating on agency problems involved with different tenure modes that may justify their different tax treatment. Furthermore, it covers various reasons proposed in the economics and popular literature on why homeownership should be favoured through public policy compared to renting. Chapter 2 analyses the tax incentives for mortgage demand. In 1993 a major tax reform was implemented in Finland which changed the tax deduction rates of mortgage interest, and thus, changed households’ incentives to borrow. The chapter studies whether households have responded to these changes. The results, based on the difference-in-differences method, show that high income households with high marginal tax rates have responded to the reduced tax incentives by reducing their mortgage borrowing compared to the control group, for whom the incentives to borrow remained more or less the same. Chapter 3 connects owner-occupied housing and mortgage debt into a broader context of household portfolio choice. The chapter presents empirical evidence on whether debt-financed owner-occupied housing, due to its nature as background risk, has an adverse effect on the amount of stocks in a household’s portfolio. The results indicate that owner-occupied housing has an adverse effect on household stockholding. More precisely, a higher house value at a given level of net wealth clearly reduces the probability that a household enters the stock market. Chapter 4 is concerned with the largest individual housing subsidy in Finland which is the non-taxation of imputed rental income. The chapter estimates the size of the subsidy and analyses its effects on household income distribution. The results indicate that owneroccupied housing has a significant impact on the well-being of many households and that the government loses significant amounts of tax revenue due to this provision. The chapter also compares the current tax system where imputed rental income is untaxed to two alternative tenure neutral tax systems where imputed rental income is taxed. The main finding is that the effects of the reform on overall inequality depend vitally on the way the increased tax revenue is transferred back to the households.