DP17520 To Own or to Rent? The Effects of Transaction Taxes on Housing Markets
Using sales and leasing data, this paper finds three novel effects of a higher property transaction tax: higher buy-to-rent transactions alongside lower buy-to-own transactions, despite both being taxed; lower sales-to-leases and price-to-rent ratios; and longer time-on-the-market. This paper explains these facts by developing a search model with entry of investors and households who decide to own or rent. The transaction tax increases the demand for rental properties, which reduces the homeownership rate and homeowners’ mobility. The deadweight loss from the tax is large at 79% of revenue, with 40% of this due to the decision to own or to rent.