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To Own or to Rent? The Effects of Transaction Taxes on Housing Markets

Lu Han¹; L. Rachel Ngai²; Kevin D. Sheedy³

¹ University of Wisconsin–Madison · ² London School of Economics, CEPR and CFM · ³ London School of Economics and CfM ,

Abstract Using sales and leasing data, this paper finds three novel effects of a higher property transaction tax: higher buy-to-rent transactions alongside lower buy-to-own transactions despite both being taxed, a lower sales-to-leases ratio, and a lower price-to-rent ratio. This paper explains these facts by developing a search model with entry of investors and households, households choosing to own or rent in the presence of credit frictions, and homeowners deciding when to move house. A higher transaction tax reduces homeowners’ mobility and increases demand for rental properties, which explains the empirical facts and leads to a lower homeownership rate. The deadweight loss is large at 111% of tax revenue, with more than half of this due to distorting decisions to own or rent.

DOI

10.1093/restud/rdaf092

Volume

93 (4)

Pages

2605-2645

Language

en

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BibTeX

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