The impact of Taxation

on Real Estate
affordability and
quality
Term Paper

ALIZADA, ISMAYIL
TABLE OF
CONTENTS

Introduction

Theoretical Framework of Real Estate

Taxation and Housing Affordability

Empirical Evidence on the Impact of Real

Estate Taxation on Housing Affordability

Policy Implications and Conclusion

References
Introduction

It has become huge challenge for many countries to provide affordable housing as
basic human need. Consequently, housing costs have been taking up a greater portion of
household income than other spending items, such as health, education, and transportation.
The affordability and quality of housing remain significant challenges across countries.
Taxation policies play a significant role in affecting housing affordability and quality. Even if
taxation being an important source of revenue for governments, it can also affect the
affordability and quality of housing markets. It is important to note that taxation policies are
not the only factor that affects housing affordability and quality. Factors such as interest rates,
inflation, and government subsidies also play a role. This paper aims to examine the impact
of taxation policies on real estate affordability and quality.

In poor nations, property taxes can be an effective instrument for raising revenue and
improving housing affordability (VoxDev, 2020; World Bank, 2016). Property taxes can
encourage property owners to make better use of their holdings and provide an incentive to
develop unused land. However, Malpezzi and Ball (2008) believe that informal housing
markets play an important role in developing nations and that housing strategies should take
these markets into account. Informal housing markets frequently operate outside of the legal
framework, and occupants' property rights may be uncertain.

The Organization for Economic Cooperation and Development (OECD) has also
issued various papers and reports emphasizing the significance of housing taxation policy
(OECD, 2021; OECD, n.d.). Housing taxation policies, according to the OECD, can assist
improve housing affordability and quality by encouraging efficient land use, reducing
speculative activity, and supporting public goods and services. However, the OECD warns
that taxation policies might be regressive, affecting low-income households
disproportionately. As a result, policymakers must take into account the distributional impact
of taxation policies on the housing market.

The property tax and real estate taxation used in literatures interchangeable but there
are certain difference between them we will summarize these differences from relevant
literatures. Related to this issues EY in 2022 issued report on Worldwide Estate and
Inheritance Tax Guide. It will be our base literature to evaluate differences and taxation
policies.

To summarize, the impact of taxation policies on the housing market is a complex

subject that policymakers must carefully address. Taxation policies can have an impact on
housing supply and demand, income and wealth distribution, and the provision of public
goods and services. As a result, authorities must balance the revenue-raising goals of taxation
policies with their influence on the affordability and quality of the housing market.
Theoretical Framework of Real Estate
Taxation and Housing Affordability
Real estate taxation is a powerful tool that governments can use to achieve a variety
of economic and social goals, including the promotion of affordable housing. To grasp the
impact of real estate taxation on housing affordability, it is necessary to first the various types
of taxes and their significance in the housing market.
Property taxes, capital gains taxes, transfer taxes, and stamp duties are all examples of
real estate taxes (OECD, 2021). Property taxes are levied on the value of a property on an
annual basis, whereas capital gains taxes are levied on the profit made from the sale of a
property. When a property is transferred from one owner to another, transfer taxes and stamp
duties must be paid. Each type of tax has a different effect on housing affordability.
The implementation of a progressive property tax is an important policy for effective
real estate taxation. A progressive property tax is one that rises in proportion to the value of
the property. This type of tax can be used to promote affordability by increasing the tax
burden on wealthy property owners and making expensive properties more expensive.
Furthermore, this type of tax can be used to reduce speculative real estate investment, which
can drive up prices and create market bubbles. Several countries have tried and failed to
implement a progressive property tax. Norway, for example, has implemented a system of
progressive property taxes based on market value. This system has been effective in reducing
speculative real estate investment.
The implementation of land value taxation (LVT) is another policy for effective real
estate taxation. LVT is a tax on the value of land, not the value of property on the land.
South Korea is one country that has successfully implemented LVT. LVT has been used in
South Korea to generate revenue and promote more efficient land use, resulting in
improved affordability and economic growth.
In addition to progressive property taxes and LVT, some countries have implemented
tax breaks to encourage the development of affordable housing. Reduced property tax rates
for affordable housing developments, exemptions from property tax for certain types of
affordable housing, and tax credits for developers who build affordable housing are
examples of these incentives. These incentives can be effective in encouraging the
development of affordable housing, but their success is dependent on their design and
implementation. In address the root causes United States, for example, Low-Income
Housing Tax Credit (LIHTC) has been successful in encouraging affordable housing
development, but critics argue that program favors large developers and fails to of housing
affordability.
Overall, the effectiveness of real estate taxation policies and practices is determined
by a variety of factors, including a country's economic, social, and political context.

Empirical Evidence on the Impact of Real

Estate Taxation on Housing Affordability

Real estate taxation is a controversial subject in public finance as it has the potential to
affect housing affordability and quality. The empirical evidence on the impact of real estate
taxation on housing affordability is extensive. This chapter will provide an overview of
empirical studies on real estate taxation and its impact on housing affordability, compares
various approaches to real estate taxation, and examines the factors that influence real estate
taxation's effectiveness in promoting housing affordability.
Several empirical studies have been conducted to investigate the impact of real estate
taxation on housing affordability in various countries. For instance, the International
Monetary Fund (IMF) conducted research on the relationship between macroprudential
policies and European house prices. The study discovered that real estate taxation, in
conjunction with other macroprudential policies, can help reduce house price volatility and
increase affordability (IMF, 2020). Similarly, an OECD report on housing taxation in OECD
countries examined property taxation's effectiveness in promoting affordable housing.
Property taxation is generally effective in raising revenue for local governments, according to
the report, but its impact on housing affordability is dependent on how it is implemented
(OECD, 2021).
The effects of various strategies to real estate taxation on housing affordability have
been compared. For example, a study on land value taxation in South Korea discovered that
by reducing land speculation, this approach can promote efficient land use and improve
housing affordability. Transfer taxes, such as stamp duties, on the other hand, have been
criticized for increasing housing transaction costs and reducing housing affordability.
When it comes to promoting housing affordability, real estate tax policies and
practices have had moderate success. Reducing land speculation, generating income for local
governments, and increasing housing affordability have all been achieved using certain
policies, such as land value taxation and property tax reform.
In conclusion, the empirical evidence on the impact of real estate taxation on housing
affordability is extensive and covers various countries and approaches to real estate taxation.
Real estate taxation can be effective in promoting housing affordability, but its impact
depends on how it is implemented and the broader institutional context. Policymakers should
carefully consider the design of the tax system and engage stakeholders in the tax reform
process to ensure that real estate taxation contributes to the goal of promoting affordable and
quality housing for all.

Data and methodology

To examine the general relationship between Housing affordability, and real estate
taxation we estimated panel regressions for each region as well as pooled data. Our
dependent variable is Housing index. We used housing index as indicator of housing
affordability and quality. Our empirical model is:

HOUSING= β0 + β1INE + β2RET+ β3MFEE+ β4SAVINGS + β5PRICES+ E

where INE is the inequality level represents the level of income inequality within a given
region or country. RET is Real Estate Taxation real estate tax rates within given region or
country, MFEE mortgage fees indicate fees and interest rates associated with obtaining a
mortgage, SAVINGS and PRICES subsequently represents average savings of households and
the average price per square meter of apartments in a given region or country. E represents
errors. We have added relevant dataset source in Table 1 (APPENDIX). Also we will
consider impact of real estate taxation on construction industry to evaluate effectiveness of
tax rate in case we can derive data for construction market. It is questionable to find to collect
relevant data for construction market.

Policy Implications and Conclusion

The policies and practices used in various nations to promote housing affordability
through real estate taxation have been examined in the previous sections.
With the result we will derive from our empirical equation we will indicate most
significant factor affecting housing affordability
Real estate taxes may be a significant factor in promoting housing affordability,
according to empirical data. However, the design of the tax system, the broader political
environment, and the institutional strength of the government are just a few of the variables
that affect how effective real estate taxation policies are. In addition, to effectively promote
affordable housing, real estate taxation must be comprehensive and balanced, taking into
account both supply-side and demand-side factors.

References

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Tax policy and the economy (Vol. 1, pp. 113-138). MIT Press.
 International Monetary Fund. (2020). Macroprudential policies and house prices in
Europe. https://www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/
Issues/2020/02/20/Macroprudential-Policies-and-House-Prices-in-Europe-48627
 International Monetary Fund. (2023). Housing taxation and macroeconomic stability:
A cross-country analysis. IMF Staff Papers, 70(1), 1-34.
https://www.elibrary.imf.org/view/journals/002/2023/107/article-A003-en.xml
 International Monetary Fund. (1968). The role of land taxation in economic
development: Some theoretical considerations. IMF Staff Papers, 15(2), 307-329.
https://www.elibrary.imf.org/view/journals/024/1968/002/article-A006-en.xml
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https://voxdev.org/topic/public-economics/how-developing-countries-can-boost-their-
property-tax-revenues-evidence-mexico-city
 Bird, R., & Slack, E. (2004). International handbook of land and property taxation.
USAID and World Bank Institute. https://pdf.usaid.gov/pdf_docs/PNADW480.pdf
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Appendix

Table1: Data sources for variables

Explanation of variables Data source
Housing index https://stats.oecd.org/Index.aspx?DataSetCode=HOUSE_PRICES).

Inequality level (INE) https://stats.oecd.org/Index.aspx?DataSetCode=IDD).

Real Estate Taxation (https://stats.oecd.org/Index.aspx?DataSetCode=REV).

(RET):

Mortgage fees (MFEE) (https://stats.oecd.org/Index.aspx?DataSetCode=INTFIN).

Savings(SAVINGS) https://stats.oecd.org/Index.aspx?DataSetCode=HH_DASH).

Prices (PRICES) (https://stats.oecd.org/Index.aspx?DataSetCode=HOUSE_PRICES).