Property tax reform and the impact on homeownership
Homeownership is often seen as a symbol of stability and personal accomplishment. But for some, the high cost of owning a home is turning this dream into a nightmare. “Not only is homeownership something that many households aspire to, for those who already own a home, it is their single biggest asset,” says Matthijs Korevaar, a researcher at the Erasmus School of Economics. “This means that any shock – such as a new tax or regulation – could have long-term consequences on buying and owning a home.” With the support of the EU-funded HISHOUSHOCK project, Korevaar set out to better understand the impact these shocks can have on the European housing market.
The long-term effects of property tax reform
To start, Korevaar studied the long-term effects an 18th century property tax reform in Amsterdam had on housing wealth and costs. “This reform meant that some households unexpectedly had to pay more taxes on their property, while others ended up paying much less,” explains Korevaar. Applying standard economic thinking, one would expect that such a change would cause those households facing higher taxes to sell their homes and move to a cheaper area. Furthermore, these homeowners would have to sell their homes for less, as higher property taxes reduce the value of the home and, as a result, the wealth of the homeowner. However, Korevaar found that the effect of such property tax reforms goes well beyond this impact on individual wealth. “What we found is that most households didn’t move, even if their tax payments increased substantially,” he says. “Instead, they paid these higher taxes almost entirely out of their savings, with many seeing their savings run dry before being forced to sell their homes.” The long-term effect was that many homeowners died with a low net worth, and properties across the city lost value. “The allure of homeownership remained dim for over a century,” adds Korevaar.
Property tax reform and homeowner wealth
What does this mean for the modern property market? “The insight gained from this research shows that property tax reforms can have much larger and longer-lasting effects on households than previously understood,” remarks Korevaar. While this might explain why such reforms remain unpopular today, it could also help governments implement policies that can absorb some of the shock. For example, to induce people to move, governments could forego the high transaction taxes that currently make moving more expensive than staying. “While this particular reform happened centuries ago, many European countries are considering similar reforms today,” notes Korevaar. For instance, during the project, which received support from the Marie Skłodowska-Curie Actions programme, the Netherlands implemented a new policy that allows local governments to ban investors from buying housing to rent out. This change has caused a shock to local homeowner rates because properties can only be bought by, and thus sold to, owner-occupiers. According to Korevaar, his research could be used to help policymakers avoid such mistakes. “By contributing to a better understanding of the housing market and how different policies can impact homeownership and homeowner wealth, I believe my research can help policymakers avoid the mistakes of the past,” he concludes.
Keywords
HISHOUSHOCK, property tax, tax reform, homeownership, shocks, tax, regulation, housing market, homeowner wealth
