IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

Residential Stability or Rational Bubble: Proposition 13 in Southern California

  • Mark Hoven Stohs


    (Department of Finance, College of Business and Economics, California State University, Fullerton, CA 92834)

  • Yun W. Park

    (Department of Finance, College of Business and Economics, California State University, Fullerton, CA 92834)

Registered author(s):

    California’s Proposition 13, which limits the growth of property tax to 2 percent per year, provides homeowners an incentive to remain in their housing units and thus contributes to residential stability. Yet, with fast home price appreciation, new home buyers may purchase a home and then sell it again within a short period of time. Even though they incur transaction costs, they can gain by the appreciation. Under Proposition 13, faced with a disproportionately large property tax relative to those homeowners who purchased their homes a long time ago at a much lower price, the new homebuyers have an additional incentive to trade homes fast in an up market to avoid paying a high property tax. We call this short term residential trading ‘Proposition 13 risk arbitrage’ and predict that Proposition 13 induces additional short-term residential trading, which adds to the underlying residential market speculation. Cross-sectional variations of the residential holding periods over the 1993 to 2001 period in the five counties of Southern California are generally consistent with the predictions based on Proposition 13 induced trading: Households which face a higher property tax per square foot and those that experience larger capital gains show a shorter holding period. We also explain the time variation of the aggregate residential holding period using the Proposition 13 risk arbitrage argument.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    File Function: Full text
    Download Restriction: no

    Article provided by Asian Real Estate Society in its journal International Real Estate Review.

    Volume (Year): 10 (2007)
    Issue (Month): 1 ()
    Pages: 26-47

    in new window

    Handle: RePEc:ire:issued:v:10:n:01:2007:p:26-47
    Contact details of provider: Postal: Asia Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
    Web page:

    Order Information: Postal: Asian Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
    Web: Email:

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Mark Mitchell, 2001. "Characteristics of Risk and Return in Risk Arbitrage," Journal of Finance, American Finance Association, vol. 56(6), pages 2135-2175, December.
    2. Roland Benabou, 1991. "Workings of a City: Location, Education, and Production," NBER Technical Working Papers 0113, National Bureau of Economic Research, Inc.
    3. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    4. Mark J. Eppli & Monty J. Childs, 1995. "A Descriptive Analysis of U.S. Housing Demand for the 1990s," Journal of Real Estate Research, American Real Estate Society, vol. 10(1), pages 69-86.
    5. Potepan, Michael J., 1989. "Interest rates, income, and home improvement decisions," Journal of Urban Economics, Elsevier, vol. 25(3), pages 282-294, May.
    6. Baker, Malcolm & Savasoglu, Serkan, 2002. "Limited arbitrage in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 64(1), pages 91-115, April.
    7. Aaronson, Daniel, 2001. "Neighborhood Dynamics," Journal of Urban Economics, Elsevier, vol. 49(1), pages 1-31, January.
    8. Nada Wasi & Michelle J. White, 2005. "Property Tax Limitations and Mobility: The Lock-in Effect of California's Proposition 13," NBER Working Papers 11108, National Bureau of Economic Research, Inc.
    9. Benjamas Jirasakuldech & Robert Campbell & John Knight, 2006. "Are There Rational Speculative Bubbles in REITs?," The Journal of Real Estate Finance and Economics, Springer, vol. 32(2), pages 105-127, March.
    10. G. Donald Jud & Terry G. Seaks, 1994. "Sample Selection Bias in Estimating Housing Sales Prices," Journal of Real Estate Research, American Real Estate Society, vol. 9(3), pages 289-298.
    11. Mark Hoven Stohs & Paul Childs & Simon Stevenson, 2001. "Tax Policies and Residential Mobility," International Real Estate Review, Asian Real Estate Society, vol. 4(1), pages 95-117.
    12. Quigley, John M, 1987. "Interest Rate Variations, Mortgage Prepayments and Household Mobility," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 636-43, November.
    13. Epple, Dennis & Romer, Thomas, 1991. "Mobility and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 828-58, August.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:ire:issued:v:10:n:01:2007:p:26-47. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (IRER Secretary Office/Webmaster)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.