METODOLOGIA GENERAL 1 Nivel de estudio

In general, the price of housing is determined by both demand and supply-side factors. Previous studies on house prices propose models that shed light on the plethora of variables that could potentially drive house prices. Empirically, drivers of house prices have been extensively studied. Many papers suggest that income, population, rent and interest rate contribute to the demand for housing (Abeysinghe & Gu 2016; Agnello & Sousa 2011; Ambrose, Eichholtz & Lindenthal 2013; Barari et al. 2014; Himmelberg, Mayer & Sinai 2005; Holly, Pesaran & Yamagata 2010; Kemme & Roy 2012; Kivedal 2013; Meese & Wallace 2003; Muellbauer 2012; Sommer, Sullivan & Verbrugge 2013).2

Little attention, particularly in the Australian literature, has been given to factors that influence supply-side dynamics of house prices.

This chapter looks beyond the assumption that governments only interact with the housing market through taxation as a component of the user cost of capital. It assesses the direct impact of government through revenue extracted from the Australia housing market by state and local governments while accounting for changes to housing supply. This analysis will provide a better understanding of the regulatory effect of various levels of government on the dynamics of house price changes in Australia. To explore regulatory burden, this chapter introduces several government revenue variables. The empirical analysis is conducted using a two-pronged approach in a panel setup. First, we assess the effect of government regulation on house prices within a fixed effects model, controlling for numerous fundamentals of house prices. This tactic allows us to account for heterogeneity across regions and time, but it does not address potential endogeneity present in this model. To address potential endogeneity, the panel vector autoregressive

(PVAR) setup of Love and Zicchino (2006) is employed after identifying the key variables from the fixed effects analysis.

In general, two types of state and local government revenues are collected through taxation levied in the housing market. The first type is the tax on immovable property, which includes land taxes and municipality rates. The second type is the tax on financial and capital transactions, which is levied when a property is passed from one homeowner to another like the financial institution transaction taxes, government borrowing guarantee levies, stamp duties on conveyances and other stamp duties.

The sum of revenues generated by these taxes varies between states and territories. This essay examines several state-specific taxation revenues generated from the sale or occupation of a dwelling and the land on which it resides. In addition, it incorporates municipality revenues collected by local governments from owners of property in their relevant municipalities. This essay focuses on three key government revenues: municipality rate revenue, stamp duty revenue and land tax revenue.

Figure 2.1 shows the three revenue categories that comprise the largest part of government income from housing taxation in Australia. Appendix E2 demonstrates how these revenues differ between states. Municipality rates and land tax revenue are both levied at the point of transaction. The rate that is levied for land tax revenue is controlled by the state government, while municipality rates are controlled by the local government. Stamp duty revenue is generated by the state and levied at the point of transaction. These distinctions have important implications for the interpretation of results.

Figure 2.1: Taxation revenue on property: all states and local government (ABS 2013)

Stamp duty revenue can be interpreted as the transaction cost of purchasing a property. Evidence from property transactions at a postcode level in Australia suggests that the incidence of this tax falls on the seller (Davidoff & Leigh 2013). A study examining the 2007–2008 United Kingdom ‘stamp duty holiday’ supports this finding. Besley, Meads and Surico (2014) find that the buyer accrued 60 per cent of the surplus generated from this holiday. This chapter considers the regulatory effect of stamp duty on house prices in a panel context as one of the three key areas in which government revenue is generated from the housing market.

Consider a household that wants to relocate. The homeowners may consider the burden of stamp duties and the difference between stamp duties across states in their decision- making process of where to relocate. Davidoff and Leigh (2013) explore this selection process using subsampling of postcodes within 50 kilometres of a state border in Australia.3 _{Their results suggest that house price elasticity of stamp duty payable is}

substantially higher in those regions. Alternatively, households may incorporate the additional burden of government into the price of the dwelling as a component of the

construction cost or transfer cost. As stamp duties are levied at the point of transaction, this imposition can create a significant burden for households to relocate.

Excessive regulation and stamp duty burdens could result in a mismatch of dwelling characteristics with household types (e.g., the opportunity cost of stamp duties may be an additional bathroom). Conversely, the household may be forced to accept newly built accommodation with desired characteristics in a less desirable area (such as an outer area where travel time is costly). This could exert flow-on effects to the wider economy. For example, households may be incentivised to remain in under-employed positions if they cannot freely move between national labour markets. Workforce productivity could further be affected by increased travel times, a rise in the number of productive workers being pushed to outer city limits and household stress increasing due to the previously mentioned dwelling-household mismatch.

Unlike stamp duties, land tax and municipality revenue are levied annually. Municipality rates are levied to provide services and maintain amenities of a given municipality. Therefore, this study examines the effect of local government revenue extraction from housing ownership within a given area. Fixed effects used in the regression analysis attempts control for differing amenity characteristics and infrastructure such as public transport. Municipality revenue differs from land tax revenue because municipality rates are levied at both owner-occupants and landlords. In contrast, land tax is generally levied to those who own property for a purpose other than residing in it as their principal place of residence (landlord). This can be interpreted as an investor’s response to government intervention in the housing market. It is possible for an investor’s response to a change in revenue taken from the housing market to be different to that of the owner-occupant.