To Own or to Rent? The Effects of Transaction Taxes on Housing Markets
Lu Han, L. Rachel Ngai, Kevin D. Sheedy
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 timeon-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.
Event: World Bank Land Conference 2024 - Washington
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