Taxing homes in an economic boom and subsidising them in a crash could prevent the next housing crisis

Financial crises may be made worse by current mortgage and housing tax systems according to new research from the University of Surrey. The study argues that the country should consider taxing housing purchases during strong economic periods but providing temporary subsidies on housing during recessions.  

The study, published in the Journal of Economic Dynamics and Control, argues that, without targeted intervention, borrowers are forced to sell homes at depressed prices in downturns which triggers deeper crashes and tighter borrowing conditions that harm both families and the wider economy. The findings show that today’s credit rules make the economy more vulnerable to sudden shocks and unnecessarily deepen recessions.  

Ricardo Praca Cavaco Nunes, co-author of the study and Professor of Economics at the University of Surrey, said: 

 
“The biggest gains come from helping households recover after a downturn rather than trying to restrict households before a crisis happens. If we cushion house price collapses, we protect borrowers at their most vulnerable moment which in turn protects the wider economy.” 

The study used a quantitative economic model and simulated thousands of possible economies where house prices are used as collateral for mortgage borrowing. The method looked at how taxing housing purchases in high productivity periods and subsidising them in low productivity periods affects house prices credit conditions and consumption. The model included two types of household, borrowers and savers, and tracked how each group fared under alternative tax policies. The approach compared a world with no policy to a world with state contingent interventions. 

The findings show that taxing housing in good times does very little to prevent excessive borrowing but subsidising housing investment in recessions lifts house prices exactly when the system is at greatest risk. It prevents fire sales and severe price collapses easing the collateral constraints that normally destroy access to credit when families need it most. Surprisingly, both borrowers and savers end up better off in the long run because more stable housing markets improve access to credit and build stronger household balance sheets over time. 

Professor Ricardo Praca Cavaco Nunes continued: 

“What really makes the difference is what happens after a crash. Instead of trying to limit people before a downturn we should be helping them recover once it hits. Our results show that modest temporary support during recessions can protect living standards and prevent the long-lasting financial damage that families so often face after a crisis.”  

[ENDS] 

 Note to editors 

• Professor Ricardo Praca Cavaco Nunes is available for interview, please contact mediarelations@surrey.ac.uk to arrange.   

• The full paper is available in the Journal of Economic Dynamics and Control