Housing Taxation in Europe

Tax incentives favouring homeownership are widely used in developed economies. Homeownership is often thought to bring a number of positive contributions, from the promotion of households´ saving to enhanced community engagement. However, housing tax incentives are also considered as a major source of distortions for households´ decisions, especially in absence of taxation of in-kind services related to housing consumption (i.e. imputed rents) and in presence of mortgage interest payment deductibility. These distortions can have wide-ranging consequences for investment, consumption and public finances. Housing tax distortions have rarely been analysed from a cross-country perspective over time, however, not least because of the absence of comparable data and the difficulty to gather detailed information on the specific tax treatment of homeownership.

The recent JRC working paper Housing taxation: a new database for Europe[1] aims to fill the data gap by providing comparable time series on the main features of housing taxation in European countries. The housing taxation database includes information on transfer taxes incurred when buying a house, implicit recurrent property taxes owed by households, capital gain taxes, imputed rent taxation and mortgage interest tax reliefs. The data is provided for the period 1995-2017 and will be updated annually and made available at the following website: https://ec.europa.eu/jrc/en/thematic-research-fiscal-policy/housing-taxation.

This data is also used to estimate the user cost of owner-occupied housing (UCOH) following the approach proposed by Poterba, (1992) and Poterba and Sinai (2008), which provides a synthetic indicator on the distortions exerted by the tax system on households´ housing investment choices. A number of additional data used to calculate the UCOH indicator, such as maximum loan to value ratio and maximum loan duration, interest rate for long-term government bonds, interest income tax and house price are also provided in the database.

The analysis shows that homeownership varies greatly across EU countries. Homeowners are typically granted specific tax advantages through exemption from capital gain taxes, exemption from imputed rents and mortgage interest tax reliefs. There is an even greater variation in the share of homeowners with a loan or a mortgage, reflecting cross-country differences in financial development and other institutional features. Maximum loan to value (LTV) ratios are high although in practice actual LTVs are usually much lower than the legal maximum, while the evidence suggests that high LTV ratios and long loan duration coupled with a generous tax treatment can fuel home acquisition and house prices in a significant way.

Contribution of taxes to the user cost of owner-occupied housing, 2017

The cross-country differences in the tax treatment of homeownership are partially reflected in the differences of the UCOH indicator, although these differences can also be attributed to other non-tax and institutional factors. The graph above shows the UCOH indicator, which varied from less than 1% of the house value in Lithuania up to almost 10% in Greece, and the contributions of different taxes to the user cost indicator across the EU in 2017. While the UCOH has tended to decrease over the past two decades, largely under the influence of the global fall in interest rates, tax factors have become more prominent over time in order to explain the variation of this indicator. Many countries have reduced the generosity of tax rebates over the past ten years, especially by reducing or scrapping mortgage interest deductions. Recurrent property taxes remain the most important tax component of the user cost of homeownership, however.

The housing taxation database could also be useful for policy analysts and researchers in order to assess the impact of housing taxation on the economy, including for instance house prices, housing demand, households´ indebtedness among others, as well as to track the impact of tax reforms affecting housing acquisition, considering in particular its interaction with the personal income tax system.

[1] Barrios S., Denis C., Ivaškaitė-Tamošiūnė V., Reut A. and Vázquez Torres E. (2019), Housing taxation: a new database for Europe, JRC Working Papers on Taxation and Structural Reforms No 08/2019, European Commission, Joint Research Centre, Seville.