It is common that governments favour home ownership also via personal income taxation. Particularly deductibility of mortgage interest payments can stimulate households to borrow to acquire their dwellings. On the one hand the tax advantage can be effective at achieving social objectives, but on the other hand there is agreement that the housing taxation creates substantial distortion that may increase house prices and household leverage which may have adverse consequences on both micro- and macroeconomic levels. Our aim is to explore whether there is a relation between the advantageous tax treatment of housing and household indebtedness. We employ the multiple regression and pooled cross-sectional data for the former 15 EU member countries (except Greece) for the period 2004-2013. Our analysis reveals that the variable representing the extent of the tax relief on debt financing of the owner-occupied housing affected the variable reflecting indebtedness of European households between 2004 and 2013 positively.
Keywords: Household indebtedness, Housing taxation, Mortgage interest deductibility