Abstract
We analyze by far the most extensive database yet employed in estimating capitalization of below-market interest rates into asset prices: nearly 300,000 sales of owner-occupied homes in Sweden from 1981 to 1993 with 27,000 including government-subsidized interest rates. Our estimates indicate very clearly that interest subsidies are capitalized into house prices. The below-market financing parameter is consistently significant in all model specifications, irrespective of assumptions about the degree of foresight, representation of the age structure, and interest rate measure for all ten regions that we have studied. In our favored model specification, the estimated capitalization coefficients center on unity, indicating full capitalization of after-tax interest rate subsidies.
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