Housing market responses to the mortgage interest deduction

Abstract

After a decade under federal control, the Belgian regions became responsible for the mortgage interest and capital deduction (MICD) in 2015. One region drastically reduced the average subsidy while another left it unaffected. Exploiting this variation in a difference in differences design, we estimate the impact on prices, construction and sales. The tax subsidy largely capitalizes in the price of houses and developable land. The response in prices together with a lack of effect on buildings permits suggest the supply of land is inelastic. Finally, a small but insignificant positive effect indicates the reduction did not depress house sales.