Impacts of property tax changes on housing prices in the United States
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School of Business |
Master's thesis
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Date
2022
Department
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Mcode
Degree programme
Economics
Language
en
Pages
40
Series
Abstract
The decades-long rising housing market in the United States requires an in-depth understanding of the mechanism shaping the sustained high housing prices. This paper tries to ask the question from the perspective of changes in housing demand, specifically, how would property tax negatively affect housing prices. This is known as standard capitalization theory, first proposed by Oates (1969) and Yinger (1982). I intend to test for such relationship in the paper. Given the evaluation of the relationship is often obstructed by endogeneity of property tax to public goods provision and by the unobserved differences in neighborhood characteristics, a quasi-experiment design is needed. I utilized a property assessment reform that decreased property tax rate in early 2000s Indiana, by looking within boundary counties located at each side of Indiana. Since the Indiana reform is largely exogenous, counties then only differ by the level of property tax rates. Thus, I effectively isolate the impacts of property tax on house prices, with the help of an event study method. I found that as houses in Indiana are subject to a property tax rate cut of around 5.66%, their prices grow by 4.09% in the year of the tax change – for every 1% drop in property tax rate, house prices increase by 0.72%. The finding holds up to different sensitivity checks. But such relationship vanishes around 3-7 years after the policy change. To further examine the mechanism behind the lack of long-term capitalization effects, I concluded that even though demand for owner occupancy did increase, the long-term supply for owner occupied housing is elastic enough to offset the change and caused the zero results. The findings highlight the significant role of supply in shaping the long-term capitalization effects. They also shed light on the importance of effective measures in maintaining housing prices and ownership in regions where owner occupants have been priced out of the property market.Description
Thesis advisor
Akbar, ProttoyKeywords
housing market, property tax, urban economics, homeownership