owners vs renters of housing

Everyone needs a roof over their head, a place to live. This need can be satisfied by owning or by renting. The choice has consequences for tax that is payable. Homeowners pay no tax on benefits (notional income) they receive from housing. Renters, in contrast, pay full income tax on the rent they pay for housing. I always thought that fairness required taxation of the imputed rent of owner-occupied housing. FT columnist Martin Wolf has another, very feasible solution that never occurred to me: give renters the same privilege that homeowners receive. How? Make rental payments tax-deductible.

Some countries provide even more perks to homeowners, by providing cash grants to first-time purchasers of housing, or by making mortgage interest tax-deductible. Such policies should also cease, unless government wants to subsidize homeowners. I can’t think of any rational reason for such a policy. Owners tend to be wealthier than renters, so the subsidy is very regressive. In addition, home ownership discourages labour mobility. Unemployed renters can move easily to a location where jobs are available. Selling a home is costly, especially in an economic downturn, so discourages relocation.

Here is a small excerpt from Martin’s column. There is much more in the full column, so do read it. His main point is that finance of housing is important, and is a major contributor to macroeconomic instability.

Rising house prices justify more lending; and more lending then drives house prices higher. In the process, housing finance may generate asset-price bubbles, huge increases in leverage and unsustainable household spending. This is exactly what happened in many countries in the run-up to the post-2007 crises.

Behind all this lies a strong social consensus in favour of owner-occupation. This has justified a range of subsidies for this form of tenure. One of these is widely ignored: the universal failure to tax “imputed rent”. Owner-occupiers in effect “rent” from themselves. But this notional “rent” is tax-free. Landlords, however, pay tax on the rent they receive This makes owner-occupation far cheaper than renting the same property. Interestingly, this tax advantage would be ended if rent were tax-deductible.

Martin Wolf, “Deeper reform of housing finance is vital for stability“, Financial Times, 19 September 2014.

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