Center for Regional Economic Development (CRED)

Land use policy and real estate

Core competence: Regulation of real estate markets

Real estate is one of the most important assets of private households. For example, property values make up over 30% of the net worth of Swiss households. At the same time, the public sector intervenes in a variety of ways in the property market. They regulate the land use and construction activity, but also the rental market. The second important form of public intervention includes subsidies and tax incentives to promote homeownership and public housing. Current political challenges in this area relate, for example, to the equal treatment of owners and renters in the tax system. To attain this, Switzerland tries to create a balance between the mortgage interest deduction and the imputed rent taxation.

In our projects, we examine the challenges of the public sector to provide efficient framework conditions for the real estate markets. Among other things, we analyze the reaction of the housing supply to regional price and rent changes or the interaction between the rental value taxation and the mortgage interest deduction.

CRED Land-Use Restrictiveness Index (CLURI)

How does the mortgage interest deduction in the US affect the proportion of homeowners and the property markets?

One of the most widespread incentives for homeownership is the mortgage interest deduction. The effects of these subsidies on the US federal income tax revenue are significant. In the United States, the mortgage deduction amounts to 100$ billion loss in potential tax revenue.

Although these tax incentives create increased demand for homeownership, the effectiveness is controversial. First, the supply of housing in urban areas is scarce and can only be increased at considerable costs. Accordingly, the increased demand in cities leads to higher house prices without resulting in more homeowners. Second, these tax benefits are regressive because wealthy households have higher tax deductions since they own disproportionately more expensive houses. Third, the tax incentives apply to all homeowners, even though they do not influence the tenure decision at a certain income level. 

CRED: Regulierung von Immobilienmärkten / Regulation of real estate markets
Figure 1: Average mortgage interest deduction subsidies per homeowner. Dark green regions have the highest subsidies.

In a current research project on the US, we use a spatial equilibrium model to investigate the effectiveness of the mortgage interest deduction on homeownership and the real estate markets. Although all households have the same tax deduction options, this measure is particularly effective in areas with large undeveloped areas with lax land-use regulations. According to our analysis, the mortgage interest deduction in the US leads to an increase in house prices in urban regions with a restricted housing market. In these regions, the proportion of homeowners in the population increases only slightly or even declines. The mortgage interest deduction shifts the population from urban to rural areas and also leads to an increase in commuter flows. Overall, the increase in homeownership compared to potential tax losses is small.

Current projects

Working title Research question
The Geography of Housing Subsidies

How does the mortgage interest deduction affect homeownership and the real estate markets?

Yashar Blouri, Simon Büchler, Olivier Schöni (Laval University)

The Amplifying Effect of Capitalization Rates on Housing Supply

Does the housing supply respond differently to rent than to price increases? Simon Büchler, Maximilian von Ehrlich, Olivier Schöni (Laval University)