Reform of the Mortgage Interest Tax Relief System, Policy Uncertainty and Precautionary Savings in the Netherlands

Abstract

We examined the mortgage interest tax relief (MIR) system in the Netherlands and reforms to this system, based on answers to direct questions in survey data for the period 2010-2012. As well as tracking individuals over time and at strategic moments in the process of the policy reform, this unique data set allowed us to isolate the effect of policy uncertainty on precautionary savings and, therefore, on consumption. We found that policy uncertainty alone could increase household buffers in the form of net worth. We estimate that this uncertainty ex ante induces households to increase their net worth by around 6% (EUR 8,000 on average). Although a MIR reform could mitigate this effect on accumulated savings, we also show that reforms that are not credible ex post could exacerbate rather than mitigate the effect on precautionary savings.