I have a new paper out, looking at the impact of stamp duty on the housing market. Methodologically, the question turns out to be slightly tricky – because stamp duty is a mechanical function of house prices, a regression of turnover or prices on average stamp duty in a neighbourhood would return a positive coefficient. To get the behavioural impact, it’s necessary to form a measure of the predicted stamp duty in an area, and run this either as a reduced-form or instrumental variables regression. When you do this, the standard predictions of economic theory are borne out: places with higher predicted stamp duty rates tend to have lower housing turnover and lower house prices. Abstract below (click on the title for the full paper).
How Do Stamp Duties Affect the Housing Market?
Land transfer taxes are a substantial portion of the cost of moving house in many developed countries. However, little is known about the effect of such taxes on the housing market. Since stamp duties are endogenous with respect to the house price, I create an instrumental variable that is the stamp duty on a property, given that postcode’s starting house price and the national house price trend. In a specification with postcode and year fixed effects, this instrument effectively captures policy changes and nonlinearities in the stamp duty schedule. I find that the impact of an increase in the tax rate is to lower house prices, with the magnitude of the effect rising slightly over the medium run. I also observe impacts of stamp duty on housing turnover. A 10 percent increase in stamp duty lowers turnover by 1-2 percent in the first year, and by 4-5 percent if sustained over a 3 year period.
Of course, just because stamp duties affect the housing market, it doesn’t automatically follow that we should scrap them. My quick rundown of that issue here:
Against stamp duties:
- Internationally, Australia’s current rates are pretty high (an easy way to think about it is that stamp duty on a given house is about the new price of the car in the driveway).
- Higher mobility taxes mean that you get more mismatch between families and the housing stock (too little upsizing by young families, too little downsizing by empty-nesters).
- Higher mobility taxes mean that people may not take a job in another city (leading to lower productivity, or lower employment). Or it could mean that they live in the ‘wrong’ part of town, and waste too much time and petrol commuting.
In favour of stamp duties:
- All taxes have their distortions, and we’d want to weigh up the those imposed by stamp duty against the distortions that are a byproduct of sales, corporate or personal income taxes. Land taxes are regarded by economists as pretty efficient, and some experts argue that if large land taxes are politically infeasible, land transfer taxes are a good second-best.
- Residential stability leads to higher social capital in neighbourhoods. People ignore the negative externality that moving imposes on their neighbourhood’s social fabric, and should therefore be taxed for moving.