Taxation and housing markets with search frictions

Abstract

Housing taxation is a main policy instrument shaping households choices about homeownership and renting as well as the evolution of the housing market. We study the effects of housing taxation in a model with search and matching frictions in the property market and a competitive rental market. We show a new transmission channel of a housing tax reform that works through a “shifting” of the tax burden on secondary homes from landlords to tenants through rental prices. Property taxation affects house prices not only through the change in the user cost but also via the impact on housing rental services, as measured by the rental prices. We calibrate the model in order to estimate the effects of the recent Italian housing market taxation reforms and the extent of property taxes capitalization in house prices. We show that property taxation on owner-occupied dwellings has a negative effect on property and rental prices, whereas taxes on secondary homes have qualitative opposite effects. The simultaneous increase of both these instruments may mitigate the dynamics of prices and rents as well as the change of the ratio between the share of owners and renters, determining a partial capitalization of taxation on prices.