Housing Affordability and Transaction Tax Subsidies
32 Pages Posted: 28 Feb 2021 Last revised: 30 Mar 2021
Date Written: January 1, 2021
House prices have increased faster than average income in many countries over the last decade, raising concerns on the affordability of housing. We study the impact of transaction taxes on the real estate market and the effectiveness of tax subsidies to make housing more affordable. We show how the demand and supply elasticities for housing determine the price impact of tax subsidies and the distribution of gains between buyers and sellers. We then use data on all real estate transactions in Luxembourg from 2007 to 2018 to estimate the elasticity of housing supply and demand. For identification, we exploit discontinuities in the transaction tax schedule as well as rules on tax subsidies for new constructions. Our estimates suggest that the elasticity of house prices to transaction taxes is 0.27, so buyers capture a large part of the surplus from the subsidies.
Keywords: Real Estate, Transactions Taxes, Housing Subsidies, Housing Affordability
JEL Classification: G51, H71, R21, R31
Suggested Citation: Suggested Citation