Welfare implications of subsidization in the Dutch housing market Frans Schilder

Motive Abundance of subsidies and little study into its effect (i.e. in Dutch context) Compare recent findings using procedure as Rosen (1979) and Poterba (1992) Add impact of home equity in line with Conijn & Schilder (2010)

Context: housing market

Context: subsidies Owner-occupier - Mortgage interest deductibility - Tax exemption of capital gains / home equity Renter - Housing allowance (low income only) - Regulated rents (implicit subsidy: all renters)

Context: subsidies (2)

Welfare implications Distorted housing consumption from subsidies Koning et al. (2006): 1 bln (owners only) Romijn & Besseling (2008): 2.75 bln (renters only) Donders et al. (2010): 3.7 – 7.4 bln (all – depending on scenario)

Welfare implications (2)

Research issues National or regional markets? Estimating demand curve in regulated market Home equity Sample selectivity

Data WoON 2006 Cross-section of Dutch households Questionnaire n = Data on household characteristics, stated preferences, current consumption etc.

Model Heckman two-stage: 1.T j = γ’z j + u j M j = λ i (α u ) = φ(γ’z j / σ u )/Φ(γ’z j / σ u ) 2.Q j = β 1 X j – β 2 M j + ε j if L j * = 1 Q j = β 3 X j + β 4 M j + ε j if L j * = 0

Model (2) First stage probit Relative price Household characteristics - household income - age head of household - tenancy spell Degree of urbanisation Regional housing market dummies

Relative price Defined as: User cost of owning / User cost of renting Problematic results:

Model (3) Second stage OLS User cost per housing service Household characteristics - Household income - Home equity - Household composition - Tenancy spell - Inverse Mills’ ratio Degree of urbanisation

Results First stage – probit

Results (2) Second stage OLS - conditional

Results (3) Second stage OLS – marginal effects

Results (4) Shift in demand - linear prediction OLS

Results (5) Average welfare loss per household (Harberger-style, estimated at household level)

Results (6) Overall welfare loss

Conclusions Significant welfare losses in the housing market Caused by disrupted consumption following incentives from housing subsidies Effects larger in rental sector than in owner- occupied sector