The Impact of the Interest and Capital Mortgage Deduction on Belgium borrowing behavior
Annelies Hoebeeck & Carine Smolders
ERES Conference 26/06/2015
Context Belgium home ownership around 70-73%
Becoming an owner gives access to important tax benefits
VWT 1970 VWT 1981 VWT1991 SEE 2001 census 201140%
45%
50%
55%
60%
65%
70%
75%
% of dwellings occupied by owners
ContextBefore 2005: different system for interest cost, capital amortization and mortgage insurance premiums
Policy reform in 2005: Mortgage Interest, Capital amortizations and insurance Premiums assembled in one single Deduction: the MICPD
≠ Previous system: Fixed deduction, independent of loan size Double deduction for all couples Only for mortgages of 10 years or more… To obtain the owner-occupied dwelling… … which has to be the only dwelling of the household
Context € 2080 (in 2010 prices)
+ € 690 first ten years
+ € 70 for 3 or more children
MICPD extensive housing subsidy over the loan life
50% € 25 590 € 25 240 € 51 180 € 50 480 6% € 139 500
45% € 23 031 € 22 716 € 46 062 € 45 432 5% € 113 842
40% € 20 472 € 20 192 € 40 944 € 40 384 4% € 89 065
30% € 15 354 € 15 144 € 30 708 € 30 288 3% € 65 235
25% € 12 795 € 12 620 € 25 590 € 25 240 2% € 42 413
20-year loan of € 200.000 at an interest rate of
single HH with 3 or more dependent
children
single HH with less than 3 dependent
children
couple HH with 3 or more dependent
children
fiscal benefit over 20 year loan total interest cost
tax rate couple HH with less than 3 dependent
children
Context Hoebeeck & Smolders (2014) MICPD did not promote Belgian
homeownership due to its capitalization into higher house prices
Capitalization is mostly attributed to household behaviour
(e.g. Durning & Quigley, 1985)
Survey at a Belgian housing fair (October 2013): households do not
add the MICPD to their housing bid
Different transmission channel at work
Context
Different transmission channel at work:
more mortgages
higher mortgages
longer duration
MICPD
MORTGAGE MARKET
HOUSE PRICEHOUSEHOLDS
Context MICPD induced HH to take out more mortgages
Average loan length ↑ from 18 (2005) to 25 years (2010)
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20122013
0
20000
40000
60000
80000
100000
120000
140000
primary market
secondary market
Real estate transactions (solid line) and mortgage financing (dashed line)
Research Question MICPD = ineffective & unfair subsidy
Higher income households get a larger subsidy
No effect on homeownership
Household pay more for their house…
… and for their loan
Sellers and financial institutions are subsidized instead of homebuyers
To which extent did the MICPD change HH borrowing behavior?
Dataset First wave of the HFCS(2010)
Questions 2327 HH
Extensive set of loan characteristics
Research unit: mortgage for the household main residence Loan origination date: 1980-2010
5 multiple imputed datafiles to treat missing values
N=534
MethodologySimultaneous Equation Model of mortgage demand (D), mortgage maturity (M) and house value (H) at loan origination date
Expectaction:
Methodology step 1 Research unit: HMR loan at origination date 2010-characteristics traced back at loan year
…trivial for most variables (age, education, kids,..)
… not for income and wealth
Assumption: 2010 HH is in the same wealth decile as in loan year
Estimate permanent income with Goodman (1995) method
Methodology step 2: cope with selection bias
Methodology step 2: cope with selection bias
First solution: restrict sample
L_year > 2000 Length ≥ 10 years
Methodology step 2: cope with selection bias
Second solution: 2-stage Heckman (1979) procedure First stage: Extend dataset with
non participation (red) estimate participation (green)
with probit model Calculate
Second stage: Add to the model
Methodology step 3: calculate fiscal benefit per HH Calculate the taxable income from the gross permanent income Determine tax bracket
Select eligible households Determine yearly deductible amount (DA) per eligible HH
~ max yearly deduction per person
~ monthly amortization (capital + interest)
Tax bracket Tax rate (t)
0-7900 25%
7900-11.240 30%
11.240-18.730 40%
18.730-34.330 45%
> 34.330 50%
Max yearly deduction
Basic amount 2080 €
First 10 years + 690 €
First 10 years, ≥ 3 children + 70 €
Methodology step 4: cope with simultaneity and endogeneity Cross-equation correlation: SUR
Endogeneity of D,M, H, MICPD variable and R: 2SLS Instruments for D,M,H: all exogenous variables of the model Instruments for R:
interest rate on long term/short government bonds Instrument for MICPD over loan life: maximum yearly deduction SUR + 2SLS= 3SLS
Methodology step 5: combine results
+) ] ² (Rubin, 1987)
(Harel, 2009)
Results Permanent incomeHarel R²= 0.43
coef seconstant 11.061*** 0.107
age centered 0.001 0.003age centered squared -0.001*** 0.000number of children -0.005 0.021nubmer of other properties 0.113*** 0.042bonds 0.121° 0.086shares 0.097* 0.058other financial assets 0.011 0.126savingsaccounts 0.080 0.074mutualfunds 0.155*** 0.058high income reference period 0.036 0.100low income reference period -0.154** 0.065
Permanent income
Job, education and marital status (reference category: two working, married persons with tertiary education)Two persons working, …… cohabiting, with tertiary education -0.280 0.366… cohabiting, one tertiary education, one lower -0.128 0.085… widowed, one tertiary education one lower -1.665*** 0.595… cohabiting, with secondary education -0.137 0.103… cohabiting with primary education 4-1.96** 0.812One person working, one not working, …… cohabiting, with tertiary education -0.005 0.215… married, with tertiary education -0.219** 0.110… married, with secondary education -0.586*** 0.108… cohabiting, with secondary education -0.403** 0.182… cohabiting or married, with primary education -0.685*** 0.250Two persons retired, …… married, with tertiary education -0.884** 0.390… married, one tertiary and one lower education 0.257 0.540… married, one secondary and one lower education-0.861° 0.540One retired and one non working person, …… married or cohabiting, with tertiary education -0.930 0.600… married, with secondary education -0.804* 0.482… cohabiting, with primary education -1.073 0.799Two non-working, married persons -0.858* 0.525Two unemployed persons -0.844° 0.538Single household, …… with a regular job, tertiary education -0.569° 0.368
… with a regular job, secondary education -0.743° 0.474… with a regular job, primary -0.840 0.668… on sick, maternity leave -0.981 0.839… unemployed -1.123° 0.741
… non working -1.150° 0.795
Results Selection regression
% correct predicted= 0.834%
Intercept model: 0.587²+(1-0.587)^2= 0.515
constant -177.9*** 14.96Year of property acquisition 0.0893*** 0.007Household age 0.0468° 0.030Household age² -0.0007*** 0.0003Second residence -0.189* 0.179Retired householders -0.957*** 0.291
n=1056
Participation
ResultsMc Elroy R²= 0.648
N=534
coef se
Constant 6.415*** 2.228
T 0.038** 0.018
ln (H) 0.392** 0.175
R -0.139*** 0.048
Refinanced loan -0.052 0.081
Second HMR loan -0.331*** 0.076
Loan purpose= renovation -0.724*** 0.099
Loan purpose= renovation and purchase HMR-0.150* 0.080
Permanent income (in 10 000) -0.003 0.002
Wealth decile 0.013 0.012
Mean HH age -3.02E-04 0.006
Self-employed 0.241*** 0.085
Tertiary Eduaction 0.166** 0.065
Received inheritance or gift -0.069 0.063
Inheritance expected -0.037 0.051
Loan year prior to 2005 0.205** 0.101
MICPD over loan life 0.067* 0.036
Harel R² adjusted 0.414
Ln (mortgage demand) (D)
Results coef se
constant -11.522* 6.540
ln(D) 3.323*** 0.548
R 0.738** 0.358
Refinanced loan -0.976** 0.498
HH has other loans 2.510*** 0.702
Permanent income (in 10 000) -0.048*** 0.011
Wealth decile -0.095 0.079
Mean HH age -0.285*** 0.025
Self-employed -1.094* 0.564
Tertiary eduaction -1.230*** 0.452
Number of kids 0.461*** 0.173
Size of the house (reference category: >200m² )
[50m²-80m²] 4.457*** 1.074
[80m²-100m²] 1.979** 0.791
[100m²-120m²] 1.265** 0.612
[120m²-150m²] 0.717 0.537
[150m²-200m²] -0.051 0.473
loan year prior to 2005 2.580*** 0.728
MICPD over loan life 1.097*** 0.198
λ 1.360** 0.601
Harel R² adjusted 0.466
Mortgage maturity (M)
Results coef se
constant 9.585*** 0.710
Ln(D) 0.1617* 0.060
Second HMR loan 0.184* 0.061
Permanent income 0.005*** 0.001
Wealth Decile 0.0092 0.008
Mean HH age 0.0154*** 0.002
Self-employed 0.1225** 0.055
Recieved inheritance or gift 0.0784** 0.035
Inheritance expected 0.114*** 0.042
Size of the house (reference category: >200m² )
[50m²-80m²] -0.541*** 0.101
[80m²-100m²] -0.4672*** 0.076
[100m²-120m²] -0.322*** 0.060
[120m²-150m²] -0.307*** 0.051
[150m²-200m²] -0.192** 0.047
Average dwellingprice (in 10 000) 0.012 0.011
Total transactions (in 10 000) -0.018 0.019
Loan year prior to 2005 -0.197* 0.108
MICPD over loan life 0.008 0.019
Harel R² adjusted 0.507
ln (house value) H
Conclusion MICPD ↑mortgage maturity and demand
MICPD has no direct effect on the house price
Capitalization happens through the mortgage market
Financial institutions= real beneficiaries of the MICPD
MICPD should be eliminated