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Welfare implications of subsidization in the Dutch housing market

Welfare implications of subsidization in the Dutch housing market. Frans Schilder. 24-06-2010. 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)

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Welfare implications of subsidization in the Dutch housing market

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  1. Welfare implications of subsidization in the Dutch housing market Frans Schilder 24-06-2010

  2. 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)

  3. Context: housing market

  4. 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)

  5. Context: subsidies (2)

  6. 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)

  7. Welfare implications (2)

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

  9. Data • WoON 2006 • Cross-section of Dutch households • Questionnaire • n = 64.005 • Data on household characteristics, stated preferences, current consumption etc.

  10. Model • Heckman two-stage: • Tj = γ’zj + ujMj = λi(αu) = φ(γ’zj / σu)/Φ(γ’zj / σu) • Qj = β1Xj – β2Mj + εj if Lj*= 1Qj = β3Xj + β4Mj + εj if Lj*= 0

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

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

  13. 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

  14. Results • First stage – probit

  15. Results (2) • Second stage OLS - conditional

  16. Results (3) • Second stage OLS – marginal effects

  17. Results (4) • Shift in demand - linear prediction OLS

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

  19. Results (6) • Overall welfare loss

  20. 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

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