Part I

Overall tax revenue

more strongly to EU Members. For example, a

catching-up country with fixed or pegged exchange rate
and high capital mobility, as is the case for several of
the NMS-12, as monetary policy is subject to very tight
constraints in these cases. In several of these countries
there have been boom-bust episodes in housing (e.g.
Latvia, Hungary, Slovakia). Malta and Cyprus too have
seen sharp price fluctuations. In general, Allen and
Carletti (2010) find that in large, heterogeneous
economies such as the Euro area monetary policy and
control of credit are unlikely to be effective in
preventing real estate bubbles. That is partly because
bubbles are often regional.
Both an increase in property transaction taxes and an
increase in recurrent housing taxes might in principle
dampen price booms. An increase in transaction taxes
will generally reduce the after-tax return to the owner
of property, upon realisation, and therefore should
reduce the propensity to bid prices upward. Recurrent
taxes do the same as they make holding property more
expensive. There is some evidence as to either effect:
Crowe et al.(2011b) find that, using data for 243 U.S.
areas, a one standard deviation increase in property tax
rates is associated with a 0.9 percentage point decline
in average annual price growth (compared to annual
growth of around 5.6 percent per year). As for
transaction taxes, the use of time-limited tax credits
linked to house purchases in the U.S. and the
suspension of stamp duty in the U.K. helped stabilize
the housing market, while increases in stamp duty seem
to have dampened demand in China and Hong Kong
SAR, although this seems to have affected volumes
more than prices (48).
Recurrent taxes seem to offer some advantages over
transaction taxes. First, if the boom is a real bubble, i.e.
a situation characterised by the belief that a further
price rise in inevitable, the hike in transaction taxes
might reduce, in the short term, the offer of property as
the sellers want to recoup the cost of the tax hike; this
might accentuate the price spike. Moreover, there
might be anticipation effects: people bring forward
their acquisitions to beat the tax increase, exacerbating
the tightness of the market in the short-term. This
would not happen in the case of a hike in the annual
housing tax. Furthermore, the Crowe et al (2011) paper
finds that these taxes reduce volatility: a one standard
deviation increase in tax rates cuts it by about one
fourth. In contrast, transaction taxes might increase
volatility if they thin the market. In contrast,
Barthelemy and Prigent (2008) find that transaction
taxes result in longer holding periods for illiquid assets
(48) See Crowe et al. (2011b) for details. There might however be endogeneity
problems in this study as municipalities might be induced to cut housing tax
rates in a boom, given that revenues are strong.

such as property. Investors will tend to hold excessive

property during booms, while in a bust phase the same
investors will tend to stay out of the property market
for a longer period of time. They estimate that a
doubling of an ad-valorem tax from 5 % to 10 %
increases the holding period by about 10 %, while a cut
to 0 % would shorten the reselling period by 8 %.
Gurdgev (2009) finds that higher rates of transactionsbased property taxes will lead to higher volatility in
economic fundamentals.

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Furthermore, higher recurrent taxes create an incentive

to reduce holdings of under-utilised housing, thus
putting more housing on the market and fostering
efficiency.

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Overall, given the limitations of monetary policy,

property taxes may represent a useful additional tool in
the hands of the authorities, if they detect the existence
of a price bubble. Compared to the other available
policy lever, i.e. direct controls on credit, they have the
advantage of raising revenue, which could be used to
cut other, more distortionary taxes. A number of
practical difficulties, however, exist. First, determining
the existence and size of the bubble is known to be a
challenging exercise; this is bound to make a political
decision to increase housing taxes discretionarily quite
difficult; that might be addressed somewhat by
coupling it with a cut of the same size in another tax. It
should be noted, however, that the same uncertainties
also apply to the other available policy levers. Second,
it is probably easier to increase, in a boom, transaction
taxes than recurrent taxes, as these only affect the
relatively small percentage of the population buying or
selling a house, but that is, as we have seen above, at
the price of possibly thinning the market and hence
increasing one risk factor for price spikes, in addition to
generating the longer-term costs discussed above.
An additional practical difficulty is that in many
countries housing tax rates, particularly recurrent ones,
are set at municipality level; this creates substantial
coordination problems, as it may require a change in
the financing arrangements between central and local
government. The devolution of taxing powers may
also interact with the actualisation of the tax base, as
found by Valenduc and Reybrouck (2012) for Belgium:
whenever the central government is responsible for
setting property tax bases, but does not receive the
revenue of the tax, it is in no position to compensate
losers when updating the cadastral values. This
situation may be present in other countries as well (49).
Overall, it seems that no 'silver bullet' exists to address
(49) See Valenduc, C, Van Reybrouck, G, (forthcoming 2012)

Taxation trends in the European Union

53