Property Taxation, Bounded Rationality and House Prices

40 Pages Posted: 31 Dec 2014 Last revised: 10 Nov 2016

See all articles by Mikael Elinder

Mikael Elinder

Uppsala University - Department of Economics; Research Institute of Industrial Economics (IFN)

Lovisa Persson

Research Institute of Industrial Economics (IFN)

Date Written: June 18, 2014

Abstract

In 2008, the Swedish property tax was reformed and a cap on yearly tax liabilities was introduced. A large fraction of owner occupied houses was subject to a substantial decrease in the tax. When the reform was announced, most analysts projected - in line with tax capitalization theory - that the tax decrease would lead to significant increases in house prices. We estimate price responses and capitalization degrees, using various DID strategies, in which the price dynamics of houses that were subject to a generous tax reduction are compared to the price dynamics of houses with a more modest reduction. Our results are largely inconsistent with capitalization theory. For the majority of properties, we find no evidence that the tax cut led to increases in house prices. However, we find evidence of partial capitalization in sub-markets with highly valued properties, highly educated citizens and were it is especially difficult to increase supply. We argue that theories of bounded rationality can help explain why house buyers may fail to take a tax decrease into account in the valuation of houses.

Keywords: announcement effects, capitalization, financial literacy, housing market, inattention, saliency

JEL Classification: D01, D03, D04, D12, H22, H24, R21, R38

Suggested Citation

Elinder, Mikael and Persson, Lovisa, Property Taxation, Bounded Rationality and House Prices (June 18, 2014). IFN Working Paper No. 1029, Available at SSRN: https://ssrn.com/abstract=2543478

Mikael Elinder (Contact Author)

Uppsala University - Department of Economics ( email )

Box 513
Uppsala, 751 20
Sweden

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Lovisa Persson

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

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