Explicit Measures of Impacts of Transaction Taxes as Market Cooling Measure: Evidence from the Sellers’ Stamp Duty in Singapore Housing Market

Abstract

The paper integrates the theories of market micro structure, contagion and market illiquidity to discover the behavioural and market outcomes in responding to the Seller’s Stamp Duty (SSD) implemented by the government of Singapore to curb the exuberating behaviour in the housing markets. Using the unique experiment of the Singapore property transaction taxes, the paper explicitly quantifies the market responses to the transaction taxes. We find a “SSD lock-in” home seller could yield a housing price premium of 1.5% higher than that of a “SSD non lock-in” home seller. This marginally compensates the SSD tax rate. An SSD tax compels a “SSD lock-in” home seller to search and bargain harder, higher SSD tax strength results in higher bargaining power by at least 1.3%. We document that some “SSD lock-in” home sellers opt to lease out the property with the rents at least 0.8% lower than that of SSD non lock-in housing investors because the lock-in effect lowers their ability to search and bargain in the rental market. The magnitude of “SSD lock-in” effect is determined by the SSD tax strength. We also identify a contagion effect through which the selling decision of “SSD lock-in” home sellers influences the selling decision of “SSD non lock-in” home sellers who subsequently set higher asking prices. This amplifies the trade frictions among the “SSD lock-in” home sellers to market level illiquidity. It explains why housing transaction volumes are low while prices remain high after a transaction tax is implemented.