Are Taxes Drivers of House Prices?: Evidence from OECD Countries

Abstract

This paper investigates the determinants of house prices in the OECD countries. We focus our analysis on the role of property related taxes as well as other important macroeconomic variables. We also explore the effects of real estate taxes on the distribution of house prices, since the effects of taxes may vary over the conditional distribution of house prices. Tax is one of direct tools of government for influencing housing market. Therefore, analyzing how these taxes affect house prices provides direct policy implications. Our results suggest that the property tax is negatively associated, while the acquisition tax is positively related with the house prices. In shaping this outcome, the force from demand side as well as that from supply side are working at the same time. A higher tax usually increases costs of acquiring and maintaining houses which exerts upward pressures on house prices. On the other hand, a higher tax suppresses demand for houses because less people purchase houses as the costs increase. These two opposing forces interact with each other to yield qualitatively different results regarding the acquisition and property tax. Our finding also show that the effect of acquisition tax is positive and more influential when house prices are higher. Overall, the effect of property tax is negative. However, this tax has no effect when house prices are at low or the highest level.