The Effect of Three-Rate Property Taxation on Housing Supply

Abstract

This paper investigates the effect of a higher real estate tax rate for un-built sites on housing supply in the city of Espoo, Finland. The study finds that there are no increases in the housing construction, since year 2005, in which the additional tax was introduced in the city of Espoo. All hedonic model formulations supported this view. The study shows that the amount of housing construction can be explained by variations in apartment unit prices, unit rents of dwellings and the building cost index. Also unobserved components, which measure the effect of time, indicate that there are trends and cycles embedded with the series that have a significant effect on new housing construction. The paper also briefly investigated Tobin's q-theory and its application to explaining construction activity. The empirical study showed that the q-ratio, which is estimated as a ratio of housing prices to building costs, in conjunction with unobserved components largely explain the variability in actual housing starts.