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![Page 1: The Impact of the Interest and Capital Mortgage Deduction on Belgium borrowing behavior Annelies Hoebeeck & Carine Smolders ERES Conference 26/06/2015.](https://reader036.fdocuments.in/reader036/viewer/2022081506/56649e535503460f94b48a4b/html5/thumbnails/1.jpg)
The Impact of the Interest and Capital Mortgage Deduction on Belgium borrowing behavior
Annelies Hoebeeck & Carine Smolders
ERES Conference 26/06/2015
![Page 2: The Impact of the Interest and Capital Mortgage Deduction on Belgium borrowing behavior Annelies Hoebeeck & Carine Smolders ERES Conference 26/06/2015.](https://reader036.fdocuments.in/reader036/viewer/2022081506/56649e535503460f94b48a4b/html5/thumbnails/2.jpg)
Context Belgium home ownership around 70-73%
Becoming an owner gives access to important tax benefits
VWT 1970 VWT 1981 VWT1991 SEE 2001 census 201140%
45%
50%
55%
60%
65%
70%
75%
% of dwellings occupied by owners
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ContextBefore 2005: different system for interest cost, capital amortization and mortgage insurance premiums
Policy reform in 2005: Mortgage Interest, Capital amortizations and insurance Premiums assembled in one single Deduction: the MICPD
≠ Previous system: Fixed deduction, independent of loan size Double deduction for all couples Only for mortgages of 10 years or more… To obtain the owner-occupied dwelling… … which has to be the only dwelling of the household
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Context € 2080 (in 2010 prices)
+ € 690 first ten years
+ € 70 for 3 or more children
MICPD extensive housing subsidy over the loan life
50% € 25 590 € 25 240 € 51 180 € 50 480 6% € 139 500
45% € 23 031 € 22 716 € 46 062 € 45 432 5% € 113 842
40% € 20 472 € 20 192 € 40 944 € 40 384 4% € 89 065
30% € 15 354 € 15 144 € 30 708 € 30 288 3% € 65 235
25% € 12 795 € 12 620 € 25 590 € 25 240 2% € 42 413
20-year loan of € 200.000 at an interest rate of
single HH with 3 or more dependent
children
single HH with less than 3 dependent
children
couple HH with 3 or more dependent
children
fiscal benefit over 20 year loan total interest cost
tax rate couple HH with less than 3 dependent
children
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Context Hoebeeck & Smolders (2014) MICPD did not promote Belgian
homeownership due to its capitalization into higher house prices
Capitalization is mostly attributed to household behaviour
(e.g. Durning & Quigley, 1985)
Survey at a Belgian housing fair (October 2013): households do not
add the MICPD to their housing bid
Different transmission channel at work
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Context
Different transmission channel at work:
more mortgages
higher mortgages
longer duration
MICPD
MORTGAGE MARKET
HOUSE PRICEHOUSEHOLDS
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Context MICPD induced HH to take out more mortgages
Average loan length ↑ from 18 (2005) to 25 years (2010)
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20122013
0
20000
40000
60000
80000
100000
120000
140000
primary market
secondary market
Real estate transactions (solid line) and mortgage financing (dashed line)
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Research Question MICPD = ineffective & unfair subsidy
Higher income households get a larger subsidy
No effect on homeownership
Household pay more for their house…
… and for their loan
Sellers and financial institutions are subsidized instead of homebuyers
To which extent did the MICPD change HH borrowing behavior?
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Dataset First wave of the HFCS(2010)
Questions 2327 HH
Extensive set of loan characteristics
Research unit: mortgage for the household main residence Loan origination date: 1980-2010
5 multiple imputed datafiles to treat missing values
N=534
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MethodologySimultaneous Equation Model of mortgage demand (D), mortgage maturity (M) and house value (H) at loan origination date
Expectaction:
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Methodology step 1 Research unit: HMR loan at origination date 2010-characteristics traced back at loan year
…trivial for most variables (age, education, kids,..)
… not for income and wealth
Assumption: 2010 HH is in the same wealth decile as in loan year
Estimate permanent income with Goodman (1995) method
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Methodology step 2: cope with selection bias
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Methodology step 2: cope with selection bias
First solution: restrict sample
L_year > 2000 Length ≥ 10 years
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Methodology step 2: cope with selection bias
Second solution: 2-stage Heckman (1979) procedure First stage: Extend dataset with
non participation (red) estimate participation (green)
with probit model Calculate
Second stage: Add to the model
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Methodology step 3: calculate fiscal benefit per HH Calculate the taxable income from the gross permanent income Determine tax bracket
Select eligible households Determine yearly deductible amount (DA) per eligible HH
~ max yearly deduction per person
~ monthly amortization (capital + interest)
Tax bracket Tax rate (t)
0-7900 25%
7900-11.240 30%
11.240-18.730 40%
18.730-34.330 45%
> 34.330 50%
Max yearly deduction
Basic amount 2080 €
First 10 years + 690 €
First 10 years, ≥ 3 children + 70 €
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Methodology step 4: cope with simultaneity and endogeneity Cross-equation correlation: SUR
Endogeneity of D,M, H, MICPD variable and R: 2SLS Instruments for D,M,H: all exogenous variables of the model Instruments for R:
interest rate on long term/short government bonds Instrument for MICPD over loan life: maximum yearly deduction SUR + 2SLS= 3SLS
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Methodology step 5: combine results
+) ] ² (Rubin, 1987)
(Harel, 2009)
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Results Permanent incomeHarel R²= 0.43
coef seconstant 11.061*** 0.107
age centered 0.001 0.003age centered squared -0.001*** 0.000number of children -0.005 0.021nubmer of other properties 0.113*** 0.042bonds 0.121° 0.086shares 0.097* 0.058other financial assets 0.011 0.126savingsaccounts 0.080 0.074mutualfunds 0.155*** 0.058high income reference period 0.036 0.100low income reference period -0.154** 0.065
Permanent income
Job, education and marital status (reference category: two working, married persons with tertiary education)Two persons working, …… cohabiting, with tertiary education -0.280 0.366… cohabiting, one tertiary education, one lower -0.128 0.085… widowed, one tertiary education one lower -1.665*** 0.595… cohabiting, with secondary education -0.137 0.103… cohabiting with primary education 4-1.96** 0.812One person working, one not working, …… cohabiting, with tertiary education -0.005 0.215… married, with tertiary education -0.219** 0.110… married, with secondary education -0.586*** 0.108… cohabiting, with secondary education -0.403** 0.182… cohabiting or married, with primary education -0.685*** 0.250Two persons retired, …… married, with tertiary education -0.884** 0.390… married, one tertiary and one lower education 0.257 0.540… married, one secondary and one lower education-0.861° 0.540One retired and one non working person, …… married or cohabiting, with tertiary education -0.930 0.600… married, with secondary education -0.804* 0.482… cohabiting, with primary education -1.073 0.799Two non-working, married persons -0.858* 0.525Two unemployed persons -0.844° 0.538Single household, …… with a regular job, tertiary education -0.569° 0.368
… with a regular job, secondary education -0.743° 0.474… with a regular job, primary -0.840 0.668… on sick, maternity leave -0.981 0.839… unemployed -1.123° 0.741
… non working -1.150° 0.795
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Results Selection regression
% correct predicted= 0.834%
Intercept model: 0.587²+(1-0.587)^2= 0.515
constant -177.9*** 14.96Year of property acquisition 0.0893*** 0.007Household age 0.0468° 0.030Household age² -0.0007*** 0.0003Second residence -0.189* 0.179Retired householders -0.957*** 0.291
n=1056
Participation
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ResultsMc Elroy R²= 0.648
N=534
coef se
Constant 6.415*** 2.228
T 0.038** 0.018
ln (H) 0.392** 0.175
R -0.139*** 0.048
Refinanced loan -0.052 0.081
Second HMR loan -0.331*** 0.076
Loan purpose= renovation -0.724*** 0.099
Loan purpose= renovation and purchase HMR-0.150* 0.080
Permanent income (in 10 000) -0.003 0.002
Wealth decile 0.013 0.012
Mean HH age -3.02E-04 0.006
Self-employed 0.241*** 0.085
Tertiary Eduaction 0.166** 0.065
Received inheritance or gift -0.069 0.063
Inheritance expected -0.037 0.051
Loan year prior to 2005 0.205** 0.101
MICPD over loan life 0.067* 0.036
Harel R² adjusted 0.414
Ln (mortgage demand) (D)
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Results coef se
constant -11.522* 6.540
ln(D) 3.323*** 0.548
R 0.738** 0.358
Refinanced loan -0.976** 0.498
HH has other loans 2.510*** 0.702
Permanent income (in 10 000) -0.048*** 0.011
Wealth decile -0.095 0.079
Mean HH age -0.285*** 0.025
Self-employed -1.094* 0.564
Tertiary eduaction -1.230*** 0.452
Number of kids 0.461*** 0.173
Size of the house (reference category: >200m² )
[50m²-80m²] 4.457*** 1.074
[80m²-100m²] 1.979** 0.791
[100m²-120m²] 1.265** 0.612
[120m²-150m²] 0.717 0.537
[150m²-200m²] -0.051 0.473
loan year prior to 2005 2.580*** 0.728
MICPD over loan life 1.097*** 0.198
λ 1.360** 0.601
Harel R² adjusted 0.466
Mortgage maturity (M)
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Results coef se
constant 9.585*** 0.710
Ln(D) 0.1617* 0.060
Second HMR loan 0.184* 0.061
Permanent income 0.005*** 0.001
Wealth Decile 0.0092 0.008
Mean HH age 0.0154*** 0.002
Self-employed 0.1225** 0.055
Recieved inheritance or gift 0.0784** 0.035
Inheritance expected 0.114*** 0.042
Size of the house (reference category: >200m² )
[50m²-80m²] -0.541*** 0.101
[80m²-100m²] -0.4672*** 0.076
[100m²-120m²] -0.322*** 0.060
[120m²-150m²] -0.307*** 0.051
[150m²-200m²] -0.192** 0.047
Average dwellingprice (in 10 000) 0.012 0.011
Total transactions (in 10 000) -0.018 0.019
Loan year prior to 2005 -0.197* 0.108
MICPD over loan life 0.008 0.019
Harel R² adjusted 0.507
ln (house value) H
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Conclusion MICPD ↑mortgage maturity and demand
MICPD has no direct effect on the house price
Capitalization happens through the mortgage market
Financial institutions= real beneficiaries of the MICPD
MICPD should be eliminated