Sarkozy to Drop Mortgage-Interest Tax Deductions, Push Zero-Interest Loans

French President Nicolas Sarkozy said he’ll move to repeal the tax deductibility of mortgage- interest payments he introduced in 2007 and replace it with more zero-rate loans for buyers to promote home ownership.

The government will increase funds available to subsidized banks’ zero-interest real-estate loans to 2.6 billion euros ($3.3 billion) from 1.2 billion, he said today in the Paris suburb of Thiais after visiting a construction site.

Sarkozy said he aimed to push the percentage of French who own their houses from 57 percent toward the European average of 66 percent. The tax changes will be included in the government’s 2011 budget. He said the deductibility of interest payments failed because banks weren’t taking lower tax bills into account when deciding on granting mortgages.

“We have a shortage of housing in France, and we don’t have enough owners,” Sarkozy said. “As long as prices rise faster than salaries, we won’t catch up.”

France lacks 900,000 housing units, Terra Nova, a political research center, said in a March report. About 3.5 million French, out of a population of 63 million, have no title to where they live or have accommodations that are over-crowded, or lack proper plumbing or electricity.

The government predicts that 350,000 housing units will be built this year, up from 333,000 last year, though down from 435,000 in 2007.

The number of families eligible for zero-interest loans will rise to 380,000 from about 200,000 now, Sarkozy said. Under the new terms, the size of zero-interest loans will depend on income and vary from region to region, with the highest loans in areas of the country with the greatest housing shortages, such as the Paris region and the Mediterranean coast.

A family will be able to receive up to 285,000 euros in zero-interest loans, up from 123,750 euros now.

Buyers who took out mortgages after 2007 will continue to be able to deduct interest.

To contact the reporter on this story: Gregory Viscusi in Paris at gviscusi@bloomberg.net

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