Who Gains from Housing Market Stimulus? Evidence from Homeowner Grants with Threshold Prices

Abstract

Governments utilize home ownership schemes for the dual purpose of alleviating housing affordability and stimulating housing construction. This paper studies how the housing market responds to assistance policies by exploiting a natural experiment in Sydney, Australia, where buyers of new homes priced up to $600,000 were eligible for government subsidies between July 2010 and June 2012. We find this policy causes large distortions to the sales volume, price level, as well as area size of home transactions. Specifically, we find a large bunching just below the threshold price of $600,000, over 8 times of counterfactual density. This large bunching is from both buyers moving down the price range as well as new entrants attracted to the market by the policy. We also find new homes just below the threshold are associated with an overpricing of about $3,000, offsetting up to 56% of the received benefit. Further, we find homes are about 25% smaller in size than comparable homes in prior periods. Last, we document a wealth effect generated by these housing subsidies, where neighborhoods that receive more housing subsidies increase their new car purchases. Overall, our study sheds light on the effectiveness and externalities of housing stimulus in the form of subsidies to improve homeownership.