Irrationality in the housing market? - An empirical analysis of the capitalisation of local property taxes in the Norwegian housing market

Andreas Økland, OFS scholarship recipient 2016

Abstract

This thesis presents new evidence on the effects of local property taxes on house prices. Since 2007 there has been a significant increase in the number of Norwegian municipalities that tax housing using the local property tax, which leads to rich variations in tax rates, both over time and between municipalities. I use data from the period 2007-2015 to examine the effects of local property tax changes on house prices, exploiting these variations. I find that the effects from property taxes are heterogeneous, and not in line with what the theory of capitalisation would predict. Using fixed effects in a hedonic time dummy framework, I find no systematic effect of local property taxes on house prices, inconsistent with the theory. Further exploration show that the lack of a systematic effect does not rule out capitalisation in areas with specific characteristics. Using the difference-in-difference framework, I find capitalisation in urban areas, but not in the rural areas investigated. These diverging findings may be explained by the variation in salience of property taxes between rural and urban areas, a sign of bounded rationality in the housing market.

 

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Published Sep. 1, 2020 1:39 PM - Last modified Sep. 1, 2020 1:39 PM