Housing and housing affordability are hot political issues in the United States. Tax benefits for owner-occupied housing have played a role in this debate. But what are the potential collateral effects of these interventions into the residential housing market?

In a new Center for Financial Studies working paper, three European researchers evaluate the effects of introducing a deduction for home mortgage interest and raising limits on tax benefits for retirement fund contributions. Their paper and abstract, below the fold.

Janosch Brenzel-Weiss (Swiss Nat’l Sci. Found.), Winfried Koeniger (U. St. Gallen) & Arnau Valladares-Esteban (U. St. Gallen), Tax Incentives, Portfolio Choice, and Macroprudential Risks, Ctr. Fin. Stud. Working Paper No. 740 (Jan. 28, 2026):

We calibrate a lifecycle portfolio-choice model of homeowners facing uninsurable income risk to show that tax deductions for mortgage interest payments and voluntary pensioncontributions have sizable effects on household portfolios and macroprudential risks. The deductions reduce the after-tax cost of debt and increase the after-tax return of pension savings so that the mortgage incidence increases and portfolios shift from home equity and liquid assets towards pension savings. Because the consumption responses to a house-price decline are heterogeneous, the distribution of household debt shapes the quantitative effect of the tax deductions on the homeowners’ resilience after a house price bust.