Are mortgage interest deduction is necessary to support the Boston housing market?

I don’t think so. The deduction is a favorite among homeowners, Boston real estate agents and mortgage lenders, but its broader economic benefits are debatable.

Under current law, taxpayers can deduct their interest payments on up to $1 million in mortgage debt on both their primary residences and their second homes, and can also deduct their interest payments on up to $100,000 in home-equity loans. The law thus lowers the cost of homeownership and creates incentives to take on mortgage debt – which helps the real estate  and mortgage industries, which is a good thing, well at least for me.

But the negative is that these deduction lowers federal revenues (by a projected $104 billion in 2011), thereby adding to the budget deficit. It also encourages households to take on more debt than they would otherwise and thus helped feed the housing bubble that led to the financial crisis. Canada, by contrast, has no such mortgage tax deduction, and its housing market is healthier and less leveraged, avoiding U.S.-style booms and busts. The proposal by President Obama’s fiscal commission to sharply limit the mortgage interest deduction was a step in the right direction.

What are your thoughts?

Source: Washington Post.

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