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Mortgage interest tax break has ‘no effect’ on homeownership, says study

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“Putting a nail in the coffin of the idea that this ... affects homeownership”

A new report says the mortgage interest tax break has “no effect” on homeownership rates.

A long-time centerpiece of the government’s efforts to encourage homeownership, the mortgage interest deduction has “no effect on whether households own or rent,” according to a new study released today.

As reported by the Wall Street Journal, the study shows that the popular U.S. tax deduction, a “sacred cow” of the country’s tax code, just isn’t very effective.

“I really view this as putting a nail in the coffin of the idea that this tax break affects homeownership,” said one of the authors, Jonathan Gruber of the Massachusetts Institute of Technology.

Written by Gruber, Henrik Kleven of Princeton University, and Amalie Jensen of the University of Copenhagen, the study examined real estate data from Denmark in the ‘80s, when a change in the tax law created a natural test case to compare the deduction’s effectiveness. Cultural differences aside, the researchers felt their analysis validated previous studies that suggested the deduction was not making a big impact.

Gruber says that if the government wanted to create a deduction that encouraged home ownership, they should instead offer a tax credit for first-time homebuyers, or a deduction capped in line with median regional home prices.

The deduction, available to 30 percent of taxpayers who itemize their deductions, will reduce government tax collections by $72.4 billion in the 2018 fiscal year, based on predictions by the congressional Joint Committee on Taxation.

The report comes during speculation over the final shape of the administration’s tax cut proposal, with early indications that proposed changes to the rule would decrease its effectiveness for many homeowners.

The mortgage interest deduction has extensive support within the real estate and homebuilding industries. In a statement rejecting the report’s findings and its “apples-to-oranges” comparison, William Brown, president of the National Association of Realtors, said that, “what we know for sure is that home values would suffer if the mortgage interest deduction disappeared, potentially putting homeowners under water.”

Critics of the deduction have called it a giveaway to the real estate industry, which offers an unnecessary break to the already wealthy that only expands inequality. Economist Edward Glaeser once wrote that the deduction "encourages people to leave urban areas" as well as to “borrow as much as possible to bet on housing."