Tax Preferences and Housing Affordability: Explorations using a Life-Cycle Model

We present a dynamic life-cycle model of demand for owner-occupied housing, investment property and liquid assets. Households face transaction costs, downpayment requirements, liquidity constraints, and tax preferences for owner-occupied housing. The model replicates key facts about home ownership, liquid assets, debt and consumption. It predicts taxing imputed rent would raise enough revenue to fund a 9.15% income tax rate cut, and increase ex ante welfare of all agents. Eliminating the mortgage interest deduction (MID) also gives a Pareto improvement. Replacing MID with a refundable 24.6% mortgage interest credit would increase the ownership rate by 5.9%. Gains are concentrated among low to middle income households and young households, as housing becomes more affordable for them.