Effects of the Swedish 1983-85 Tax Reform on the Demand for Owner-Occupied Housing: A Microsimulation Approach

The effects of the Swedish 1983-85 tax reform are analyzed with respect to the housing market. A microsimulation model is used which takes into account the household's tenure choice (owning vs. renting) as well as the quantity demanded conditional on the tenure choice. The reform consists of a reduction in marginal tax rates and limitations on the deductibility of mortgage interest. The simulations show that this will cause a general reduction in demand for owner-occupied houses. On a disaggregated level, there will be an increase in the demand for small and medium-sized houses, while the demand for large units will fall sharply.