Why do many governments incentivize / subsidize (personal) home ownership?

Question

In many countries, home ownership (meaning owning one's primary residence, instead of living in rented accomodation) is subsidized or otherwise incentivized or supported by the government.

For example (not an exhaustive list, obviously):

• in Germany there used to be a subsidy for buying/building a self-occupied home (Baukindergeld)
• in the USA, there are special tax advantages for home mortgages (Home mortgage interest deduction)
• in France, there is a tax-free loan (Prêt à taux zéro (PTZ)) offered for buying a self-occupied home
• in Singapore, the government-run Housing & Development Board provides grants for buying a family home

Why do these countries provide this special support? I can see a good argument for making sure everyone has adequate housing available, but why provide special support for owning instead of renting? I would have assumed support to be based on the individual housing need, not on the ownership of accomodation.

I am particularly interested in published justification, but other considerations/theories would be interesting as well.

Answer 1

Different reasoning in different societies. Among them:

• House ownership is far from the only government subsidy affecting necessities. In germany, there is are reduced VAT rate for food, rent paid by welfare offices, etc.
• Retirement savings are often subsidized. Often home ownership is a way of retirement saving (take a loan, pay it off over a working live, own it clear in old age).
• The upper middle classes, who are able to afford home ownership with a subsidy but possibly not without it, are better able to organize their political interest than lower classes. So the political system co-opts them by subsidizing their goal.

Answer 2

In the US, it simply crept in. When the federal income tax on businesses and individuals was created in 1913, it was only natural to treat interest payments paid by businesses on loans to those businesses as business expenses. This was carried forward to interest payments on a mortgage as a deductible living expense.

The initial intent was not to subsidize mass home ownership as initially only the wealthiest Americans were subject to personal income taxes. It wasn't until the mid to late 1930s that the majority of people were made to pay income taxes. The mortgage interest deduction was of course extended to those middle class taxpayers. The 1944 Servicemen's Readjustment Act (aka the GI Bill) explicitly did subsidize home ownership by returning veterans in the form of low cost loans and a mortgage interest deduction that countered the extremely high post WWII tax rates.

The mortgage interest deduction has been changed only one time, and it snuck in as a provision in the 1987 Omnibus Budget Reconciliation Act that caps the mortgage interest deduction at one million dollars per year. (Some call this the "immaculate conception provision" because no one knows the source of this provision.) Ronald Reagan later proposed making the cap even lower, at half a million dollars. The real estate lobby was "deeply disappointed." Reagan's proposed reduction did not make it into law.

If you think the gun or pharmaceutical lobbies are powerful, think again. There are multiple very powerful lobbies (e.g., real estate, home construction, and home repair lobbies) that strongly defend the mortgage interest deduction and other aspects of federal tax law that benefit homeowners. In addition to those vested lobbies, homeowners vote disproportionately compared to renters. It's been estimated that home prices would drop by about 15% should the mortgage interest deduction be removed.

Answer 3

Whenever a question of the form "Why do governments do this?" we need to "round up the usual suspects."

• They think it will extend their time in power or increase their control or extend their influence.
• They think they can make money for themselves or their friends, relatives, associates, etc.
• They think they can wield it as a weapon against their enemies.
• They think they can use it to trade favors with people they want to influence or reward.

There are lots of obvious ways that these apply to housing.

• There is a lot of money involved in houses. If, in the USA, six million families buy a house in a year this is getting into the range of $Trillion.
• The six million families have corresponding numbers of people who vote. Both family members who live in the houses, and their friends and relatives who are glad for them
• There are large numbers of jobs involved in building and renovating houses. These people vote.
• Houses involve mortgages which in turn involve banking and accounting regulations and tax law. Pushing housing allows the politicians to get leverage over these other aspects and industries.

The harm that subsidies may do is pushed into the distant future, and hidden by layers of action. For example, if the mortgage market is distorted by subsidies, the increase in interest rates and bankruptcies may not happen for years. And it may be possible to obscure the connection. Until the result is the sub-prime crisis of 2007-2008.

So increasing housing gets them votes from trades workers. And favors from cities that get to increase property tax on houses. And loss of the subsidies can be held as a threat against people who might try to oust the politicians who could remove the subsidy.

A distorted housing market screws up the banking industry. Which is good for politicians because now they can recycle the whole process to "rescue" the banks.

These are examples of principles that are at work. The fact that they work the way the politicians like is evidenced by the fact they keep doing them. The fact that they don't work they way they say they are intended is evidenced by the fact that the housing market in subsidized locations is distorted beyond all recognition. Again, recall the 2007-2008 sub-prime crisis.

Answer 4

Other answers have addressed the economic and political aspects of why a government may incentivize homeownership. However, there are sociological reasons as well. These stem from the idea that one of the primary purposes of government is to ensure social stability.

One example of this is the institution of marriage. The theory goes, by making possibly restless young people focused on domestic life, they're less likely to commit crime, join revolts, cause trouble etc. And on the positive side, having stable emotional relations with another person is likely to improve their psychological state. Part and parcel with this is the concept of the household. If the government thinks marriage will improve stability, and having houses for married couples improves their stability further, it makes sense for the government to incentivize home buying.

Ok, but why would having a house be a stabilizing effect on someone's life? Here are a few possible reasons and their references:

• Less risk of being unhoused: Once the mortgage is payed off, the home is owned. If the person gets laid off, they don't need to worry about affording rent.
• Less financial risk: The home itself can appreciate in value and also provide collateral for loans in situations that might otherwise be financially ruinous.
• Less health risk. More communal house may be of poorer quality, impacting health outcomes. While this might not be as large of a factor now, consider the situation in the early-mid 1900s where urban rental stock was probably from the 1800s, ie without modern construction and health regulations.
• Greater educational attainment (possibly US specific reason): Schools are largely funded locally and you can typically only send your child to public schools in your district. Once initial affluent single family home communities are established, the public schools systems in those communities were better than their rural or city counterparts. This leads to better eduction outcomes for any children a person might have. Obviously, a person renting could still send their child to a school in the same community if they were geographically close, but having a home ensures your child will stay there.
• Greater community building. Simply knowing your neighbor, and knowing that they will be there for a while changes how you interact with them. There's no reason a rental building, or person living in rental units can't also have a sense of community, but its more likely that people will move in these situations, which makes it harder to form lasting bonds.

Finally, since you were looking for publications, one further link I'll provide is this study conducted by the National Association of Realtor's Research division. It goes through many of the reasons described above, and adds others.

*Caveat! All the sources I have used have their own bias. Habitat for humanity and the Association of Realtors obviously have their own reasons for wanting houses to seem good.

Answer 5

I live in Norway, where owning your own apartment or house, is almost seen as a universal right, and there are very strong tax incentives. Renting an apartment or house is very rare. Most people in Norway spend a lot of time indoors, especially during winter.

I believe the most important arguments for incentivising people to own their own house or apartment are:

1. You do not need to ask for permission for modifying your house or apartment, as long as it's within building codes. This includes any modifications you yourself need or want, even if it would reduce the sales value of the property.
2. There isn't any need to fight the landlord to get him/her to fix broken things, paint, or do cosmetic changes. You can simply do so yourself whenever you want, or when you can afford it.
3. Any improvements you do will benefit yourself, and not the landlord. If you do improvements, you get a higher price when/if you sell.
4. Being able to do modifications without asking for anyone's permission, means you don't have to move to another house or apartment as often as if you couldn't change it.
5. When you pay your mortgage, you are saving for yourself. When you pay rent, you save money for the landlord.

The first four arguments are mostly about quality of life for individuals and families. But having properties properly taken care of by interested owners, will obviously be positive for the society at large too.

The fifth argument is the most commonly cited argument by Norwegians, but probably mostly makes sense from an insider perspective, where the incentives already are in place. I do not think it is a particularly good argument for changing government policy (but I do believe the first four are).

Answer 6

One special case is Russia, where over 70% people own their homes.

Everybody knows that in early 90s, Russia was basically stolen by thugs who privatized state enterprises via opaque and corrupt process.

Not everybody knows, however, that in the same 90s, Russia also privatized state-owned homes (apartments especially) - the one apartment that you have, de jure, rented from the state at the end of Soviet period, you could now own, just by submitting some paperwork. Then you could sell it, rent it out, etcetra.

So in this case, apparently, personal home ownership can be viewed as a sort of agreement between the government and the masses - the government gets to decide what to do with means of production by giving homes for the masses to own.

Curiously, some research pieces which claim very high wealth inequality in Russia exclude the homes owned by Russian citizens from the equation. Obviously, most of the wealth owned by most of the people is their home(s), usually in the form of apartments.

Answer 7

Purely from an economical perspective:

• House ownership is a form of retirement saving: people are more willing to put aside money in a house loan than on a long-term investment account, so let's promote this way of saving.
• House ownership incentivizes people to improve their standard of living, i.e., by renovating, insulating, repairing the house. A home owner who rents out the house has little motivation to make the house energy-efficient, as the heating costs are for the renter. The renter on the other hand knows he can be evicted, so an expensive renovation that yields benefit only in the long run is risky. Owning your own house solves this, and benefits society as well (e.g., less dependence on polluting foreign fossil fuels).

Answer 8

Things that were not mentioned, but IMO worth adding:

• Renting is business. At the end of the day landlord is in for revenue, thus "renting is cheaper" is not true in general, and especially if you factor in the fact that after mortgage is payed out you are left with the asset. Government subsidizing ownership is making sure "richer" don`t get to make income from poorer, and family home is the inheritance children get, which is also significant.
• Land lords have no incentive to compete on price, thus making ownership another option is creation of that competition, or making it stronger.
• Land lords don`t have much incentive to sell their property, nor to buy more, packing people more for more rent revenue
  would be their preference, which is bad for almost everyone, but
  building industry especially.
• Here is the funny part, land lords are interested in high ownership rate. Local goverments and even countries also are. The reason is, this reduces mobility. People are less likely to move or migrate if they own their home, which reduces
  possibility that local communities become deserted, if economic
  downturn starts. Obviously land lords don`t want their expensive
  property to become useless due to large outflow from a particular location, so is local government.

Answer 9

I'll add two points to all the other good answers here: political goodwill and tax revenue.

Everybody wants to own a home one day. A government policy supporting this desire obviously earns the goodwill of such voters.

... but why provide special support for owning instead of renting?

To increase tax revenue - home owners in most countries pay some form property tax that contributes to a local government's budget, and the more property owners there are, the more tax the local government body earns. Also, note that you need homes in the first place to rent it out. So government policies that incentivise building new homes theoretically also help by preventing rents from rising, resulting in cheaper accommodation.