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, a lower sales-to-leases ratio, and a lower price-to-rent ratio. This paper explains these facts by developing a search model with entry of investors and households, households choosing to own or rent in the presence of credit frictions, and homeowners deciding when to move house. A higher transaction tax reduces homeowners’ mobility and increases demand for rental properties, which explains the empirical facts and leads to a lower homeownership rate. The deadweight loss is large at 111% of tax revenue, with more than half of this due to distorting decisions to own or rent.