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UBC Theses and Dissertations

Housing demand and taxation Heikkila, Eric John


This dissertation has two primary objectives: (1) to develop and test empirically a model of housing demand complete with tenure choice and moving costs, and (2) to demonstrate how this model can be used to evaluate alternative housing-related tax changes. The proposal evaluated here is the introduction of mortage interest deductibility in Canada. Similar income tax deductions have long been in effect in the United States and Great Britain. However, this model rejects the proposal on both equity and efficiency grounds. The housing demand model was tested empirically using a sample of households from the Toronto metropolitan area. These results confirm that transactions costs and other barriers to residential mobility are a vital component of the households' decision-making process. This key empirical result is not only important in the context of the demand for housing. It also impinges on the equity and efficiency of proposed tax changes. It is shown in this thesis that the deadweight loss attributable to mortgage interest subsidies are not as severe as has sometimes been claimed, particularly in the short run. The reason is that subsidies are effectively transformed into lump sum grants when residential immobility is high. And there is no deadweight loss due to lump sum grants. The main findings of this thesis may therefore be summarized as follows: (1) the housing demand decision is best understood when barriers to residential mobility are modelled explicitly, and (2) the presence of these barriers must be taken into consideration when calculating the short run welfare implications of proposed housing-related tax changes.

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