The capitalization of interest subsidies: Evidence from Sweden

We analyze by far the most extensive database yet employed in estimating ca pitalization of below-market interest rates into asset prices: nearly 300,0 00 sales of owner-occupied homes in Sweden from 1981 to 1993 with 27,000 in cluding government-subsidized interest rates. Our estimates indicate very c learly that interest subsidies are capitalized into house prices. The below -market financing parameter is consistently significant in all model specif ications, irrespective of assumptions about the degree of foresight, repres entation of the age structure, and interest rate measure for all ten region s that we have studied. In our favored model specification, the estimated c apitalization coefficients center on unity, indicating full capitalization of after-tax interest rate subsidies.