Taxation and Housing Markets with Search Frictions

Abstract

Housing taxation is an important policy instrument that shapes 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 for a housing tax reform that works through a ‘shifting’ effect from landlords to tenants. We calibrate the model in order to estimate the long-run effects of the recent Italian housing market taxation reforms and the extent of property tax capitalization on house prices. We show that property taxation on owner-occupied dwellings has a negative effect on property and rental prices, whereas taxes on second homes have opposite qualitative effects. The simultaneous increase in both these instruments may mitigate the dynamics of prices and rents as well as the change in the ratio between the share of owners and renters, leading to a partial capitalization taxation on prices.