Submitted Abstract
Home ownership enjoys rare unanimous support across the political spectrum, and various subsidies are common policy. In virtually all developed countries, various policies which foster home ownership are in place. Yet, little is known why homeownership warrants government intervention and how policies supporting homeownership should be organized. Popular accounts of the benefits of homeownership typically refer to social benefits of homeownership since home-owners take better care of the neighbourhood, may reduce crime rates, or have a positive influence on schooling outcomes in the neighbourhood. Worries concerning subsidies of the real estate market often refer to fueling of real estate bubbles and unhealthy levels of household leverage (in particular due to mortgage interest deductibility). The research project REREF address three major questions concerning the financial aspects of the real estate market, organized around 3 work packages: 1. What type of externalities exist in the real estate market and is there a need for a subsidy or policy intervention in the real estate market? Should real estate investors and banks react to these externalities in their design of investment products, mortgage products, and their investment decisions?2. What is the price impact of subsidies on the real estate market?3. What are optimal responses to different subsidies in the housing market from the perspective of households, banks, and regulators? These three questions touch major issues relating to the real estate market. Given the importance of real estate for individuals as well as for the financial sector, answering these questions can substantially improve the organization of the financial industry in general and the real estate market in particular. Until now, answers to these questions were hampered due to lack of (exogenous) variation in the data and availability of data. As a result, findings in the literature so far managed to derive correlations while they could not contribute to an understanding of the causal relationship. We overcome these shortcomings by i) looking at particular reforms in Sweden and in Luxembourg and by ii) using Swedish tax authority data and the Luxembourgish household finance survey.