Home equity, fiscal policy and the demand for housing The case of the Netherlands

1. Home equity, fiscal policy and the demand for housingThe case of the Netherlands Frans Schilder 23-06-2010

2. Agenda • Motive • Fiscal policy (brief) • Models & assumptions • Results

3. Home equity withdrawal impacts general economy (Cattle et al. 2004) Most households do not divest home equity (Venti & Wise, 2001) Price increase leads to equity increase leads to demand increase? (Dusansky & Koç, 2007) Motive

4. Motive (2) • Home equity: liquid or not? • Home equity: impact on general economy or predominantly on housing consumption? • Recent changes in Dutch tax law (01/01/2004)“additional loan act”

5. Fiscal policy • Mortage interest deductibility:- Box 1: income- Box 3: assets • Income from property:- Imputed rent (0.55% of value) • Mortgage lending: • - Loans in excess of 100% of value

6. Restricting fiscal benefits • Additional loan act:- Mortgage interest deductible only if mortgage is used for buying or improving housing- Decreasing liquidity of home equity

7. This study: • investigates what determines size of home equity • investigates the impact of home equity on demand • compares 2 “definitions” of home equity

8. Summary statistics • Owners higher income • Renters slighlty more mobile • Couples with children more often owners • Recently moved owners most often were owners • Pensioners slightly more often renters

10. Summary statistics (2) • Recent movers: • Relatively young • Salary is dominant source of income • Household composition depends on housing career

12. Size of home equity • Increases with income (Turner & Yang, 2006) • Decreases after pension (Turner & Yang, 2006)or not (Venti & Wise, 2001)

16. Regression • Home equity = constant + b1*gross income + b2*age + b3*occupancy duration + b4*own-to-own + b5*rent-to-own + b6*starter + b7*business + b8*pension + b9*social security + e

18. Results on size of home equity • Limited relationship home equity and income • Households seem to try to maximize fiscal benefit • Age and occupancy duration important predictors • Moving is costly and decreases home equity

19. Effect of home equity on demand • Home equity illiquid (prev.) • Price increases may lead to more housing demand via home equity (Dusansky & Koç, 2007)

20. Modeling issues • Not all households are on demand curve • Home equity not observed, but calculated:Home equity = Value – Mortgage • We therefore need assumptions for our models:1. Recently moved households are on their demand curves2. Recently moved households roll over existing home equity fully into their new dwelling

21. Regression • Tax assessed value = • constant + b1*Income + b2*couple no child + b3*couple plus child + b4*other household + b5*own-to-own + b6*rent-to-own + b7*starter + b8*business + b9*pension + b10*social security + ε • Tax assessed value = • constant + b1*disposable income + b2*home equity + b3*couple no child + b4*couple plus child + b5*other household + b6*own-to-own + b7*rent-to-own + b8*starter + b9*business + b10*pension + b11*social security + ε

24. Results on impact of home equity • Model with home equity model as illiquid outperforms model with home equity assumed liquid • Modeling home equity as liquid asset overestimates housing demand

25. Further elaborations • Elaborate the model with cost factors • Model impact of shocks to costs of housing on price development and the relationship with home equity • Model impact of home equity in existing housing demand predictions (welfare paper of Thursday)