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Housing Tax Policy and Homeowner Mobility
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This paper develops a model of "trading up" which accommodates the consumption and investment aspects of homeownership within an intertemporal framework, and which also incorporates a detailed description of the provisions of housing taxation. Numerical simulations suggest that the optimal timing of trading up is anticipated and both intertemporal utility and the value of uptrading are reduced under either the elimination of mortgage and property tax deductibility, or the taxation imputed rental income. However, the elimination of the deductibility of mortgage interest payments has the largest effects in terms of trading up as well as utility losses and the resuctions in the value of uptrading. In turn, the taxation of housing capital gains may delay the optimal timing of uptrading. Under the different policy scenarios there is a possibility that policy changes will lock-in homeowners at their current home. In fact, while the intertemporal utility from uptrading is, under the status quo, well above the utility derived from staying at the current home, under the alternative scenarios the utility differential is dramatically reduced. For example, even though inflation and housing appreciation tend to have a positive effect on the value of uptrading under the current tax system, excessive inflation and excessively high reel mortgage interest rates may lock - in homeowners at their current home.
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Nakagami, Yasuhiro and Pereira, Alfredo M., Housing Tax Policy and Homeowner Mobility (January, 1990). FEUNL Working Paper Series No. 139