Property taxes and home prices: A tale of two cities

We explore the influence of property taxes on home prices, taking advantage of a policy experiment of property taxation in Shanghai and in Chongqing starting from January 2011. Using the approach suggested by Hsiao, Ching and Wan (2012) we estimate hypothetical home prices in the absence of property taxation for Shanghai and Chongqing using home prices in other cities and provinces. We show that the OLS generates consistent estimators when the price series are non-stationary 1(1) processes. We apply the model to a panel of average home prices of 31 cities and provinces in China, and find the property-tax experiment lowered the Shanghai average home price by 11%-15% but raised the Chongqing average home prices by 10%-12%. An examination of the policy details and data on prices by home types suggests the post-treatment price increase in Chongqing can be driven by a spillover effect from high-end to low-end properties. (C) 2013 Elsevier B.V. All rights reserved.