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

Author

Listed:
  • Lu Han

    (University of Wisconsin-Madison)

  • L. Rachel Ngai

    (London School of Economics (LSE)
    Centre for Macroeconomics (CFM))

  • Kevin D. Sheedy

    (London School of Economics (LSE)
    Centre for Macroeconomics (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; lower sales-to-leases and price-to-rent ratios; and longer time-on-the-market. This paper explains these facts by developing a search model with entry of investors and households choosing to own or rent in the presence of credit frictions. A higher transaction tax reduces homeowners’ mobility and increases demand for rental properties, which reduces the homeownership rate. The deadweight loss is large at 113% of tax revenue, with more than half of this due to distorting decisions to own or rent.

Suggested Citation

  • Lu Han & L. Rachel Ngai & Kevin D. Sheedy, 2023. "To Own or to Rent? The Effects of Transaction Taxes on Housing Markets," Discussion Papers 2317, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2317
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    File URL: https://www.lse.ac.uk/CFM/assets/pdf/CFM-Discussion-Papers-2023/CFMDP2023-17-Paper.pdf
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    More about this item

    Keywords

    rental market; buy-to-rent investors; homeownership rate; transaction taxes;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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