Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2014:4: Property taxation, bounded rationality and housing prices

Mikael Elinder () and Lovisa Persson ()
Additional contact information
Mikael Elinder: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Lovisa Persson: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: In 2008, the Swedish property tax was reformed and a cap on yearly tax liabilities was introduced. A large fraction of owner occupied houses was subject to a substantial decrease in the tax. When the reform was announced, most analysts projected - in line with tax capitalization theory - that the tax decrease would lead to significant increases in house prices. We estimate price responses and capitalization degrees, using various DID strategies, in which the price dynamics of houses that were subject to a generous tax reduction are compared to the price dynamics of houses with a more modest reduction. Our results are largely inconsistent with capitalization theory. For the majority of properties, we find no evidence that the tax cut led to increases in house prices. However, we find evidence of partial capitalization in sub-markets with highly valued properties, highly educated citizens and were it is especially difficult to increase supply. We argue that theories of bounded rationality can help explain why house buyers may fail to take a tax decrease into account in the valuation of houses.

Keywords: announcement effects; capitalization; financial literacy; housing market; inattention; saliency

JEL-codes: D01; D03; D04; D12; H22; H24; R21; R38

38 pages, May 18, 2014

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