Housing and Tax Capitalisation

Abstract

This paper examines the effect of the tax treatment of owner occupied housing upon its price, commonly known as the capitalisation effect, and looks at how this has a differential impact upon distinct groups in the housing market. These groups are existing outright owners, existing owners with mortgages, potential purchasers and tenants. It is shown how gains and losses due to the tax treatment of owner occupied housing are distributed amongst these categories, and how they might be realised. Illustrative calculations are presented for each group. The paper shows how the process of capitalisation can exacerbate the unequal treatment of owner-occupiers and tenants and thus presents an argument for the withdrawal of the favourable tax treatment of owner-occupied housing. The problems for the different groups that this change would imply are also discussed.