PRUEBAS DE DUREZA MEDIANTE MICRO INDENTACIÓN. MÉTODO VICKERS

In the same vein to the standard literature on capitalisation as discussed in Section 10.1, the vast majority of scholars looking at BRs found full or close to full capitalisation, meaning that the property owners would, in fact, receive the relief. In hand with their findings, this section uncovers the methods used and the issues they encountered.

A substantial British contribution comes from Bond et al. (1996). They investigate the effects of changes to BRs on a sample of some 2,964 institutionally-owned commercial properties in Wales and England from 1987 to 1992. Their BRs are measured with data from Investment Property Databank and Valuation Office Agency. In their theoretical setting, they mainly used the mechanisms of demand and supply elasticities discussed in Section 2.1.1.1.1 and provide similar reasoning to Fraser’s (Section 2.1.3). Their theoretical framework suggests that some part of BRs will be lifted to the property owners. They argue that the demand for non-domestic properties would be sensitive to price. Whilst, the supply is not likely to be elastic. Their empirical part of the paper estimates this amount.

Their dependent variable is rental values, and independent variables are once and twice lagged BRs. They control for unemployment rates, vacancy rates and year effects, disregarding industrial and office properties since their approach does not provide satisfactory results. They use ordinary least squares (OLS) with instrumental variables (as described in Appendix 4.6) for 1726 retail properties. The instruments are current values of the local economic variables and lagged values of the property-specific variables dated t–2 and earlier. This instrumental variable estimation method does not make use of all the available moments conditions (instruments) and does not take into account the differenced structure on the residual disturbance. Their results imply that a £1 increase in BRs bills could decrease property rents by as much as £1 in the long term. In some areas (such as London and the south-east), the authors indicate that the point estimate of this effect is greater than £1, but cannot be estimated precisely. In the short term, they agree that capitalisation exists, 85% in London, 67% in the south-east and 45% in other places. The researchers do not report whether their data satisfied OLS assumptions and ignore such issues as simultaneity as discussed in the Research Design Chapter (Section 6.3.1.1.1).

Later, Mehdi (2003) publishes his PhD thesis on the capitalisation of BRs. He provides a literature review and theories around capitalisation existing before 2003.

According to these, he forms the main hypothesis ‘that property values will gradually adjust so that total occupation costs between matched pairs of properties will be equalised over time.’ (p. 2) To test this hypothesis, he collects data for business properties in six London

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boroughs. He considers two properties in close proximity which should provide equal attraction to prospective occupiers, despite being located in different boroughs. The main approach in this thesis is experimental, with matched pairs during two periods, 1973 and 1988 and then once uniform taxation was introduced between 1988 and-1998. He matches properties according to size, location, physical characteristics, building and planning use and technical criteria such as service charge. For the primary analysis 35, 21 and 21 pairs are used and for the secondary, 85, 87 and 32 pairs of industrial, retail and office premises are used. Additionally, for the primary analysis, he uses t-tests and descriptive statistics, while for the secondary data, he uses the internal rate of return. The overall conclusion of the thesis is that the hypothesis is confirmed. The property tax is fully capitalised into property values for all property types. His primary approach using cross-sectional data has a relatively small sample size and instead of real rents, it exploits rateable values. This may not be the best choice owing to infrequent, and at that time, decentralised valuations.

In 2013, Bond et al. inspired by the new enterprise zones announced in 2011, conduct a further study with the British data. One of the main features of these zones is the relief of BRs. Bond et al. (2013) adopt a hedonic regression approach. Although their approach is very similar to McDonald (1993) and Wheaton’s (1984), Bond’s et al. (2013) study introduces two significant changes. The tax rate can deviate from year to year, and the data covers a broad range of time periods. They suggest that a significant amount of tax savings is captured in more substantial rents charged by property owners. Their dependent variable is rental payment per leased area deflated by a retail price index. They also construct the independent variable by estimating their possible BRs bill per m². They use OLS to estimate their model. They find the BRs variable significant with 2214 observations.

However, once the focus is moved to the leases originating during the enterprise zones (1990-1993), the incidence reduces from 0.82 (p=0.09) to 0.59 (p=0.9).

The researchers do not report whether their data satisfies OLS assumptions. This is concerning given endogeneity issues as discussed in Appendix 4.6. Unfortunately, neither do the authors acknowledge selection issues, which are discussed in a series of papers by Rubin (1977) and the Research Design Chapter (Section 6.3.1.1.2). They seem to limit the lease term to between 12 months and 360 months, which while seeming reasonable, is not necessary valid exclusion criteria since leases may be longer than three years. The authors suggest that the average capitalisation effects should be close to 100%, so all tax incentives from the enterprise zones are received by the property owners. Other scholars looking at enterprise zones find them having a positive impact on employment (Billings, 2009;

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Hanson, 2009) but reducing employment in surrounding areas (Bondonio and Engberg, 2000).

A few more recently published studies are in line with Oates’ (1969) methodology.

For instance, Hilber et al. (2011) access the impact of central government grants on local house prices in England by using a panel dataset of 350 local councils between 2001 and 2008. They produce a macro model and estimate it with fixed effects and instrumenting.

The outcome variable in the regressions is a local house price index based on data from the Land Registry. Here the main criticism around the methodology is likely to be with regard to their instruments. They do not report testing whether random or fixed effect estimator is more efficient, for instance, with Hausman test. They maintain that the Labour party may have used the grant system to allocate more money to areas where it dominates the local council even by a narrow margin. Such variables as region-year fixed effects, the labour share of seats and authority type year fixed effects may contribute to productivity and income shocks may be questionable. A counter argument may be the recently published data on UK government debt by Office for Budget Responsibility (2017). They found that actual government debt increased significantly under the Conservative ruling. The finding suggests that government grants are fully capitalised into the residential property values.

Also, they acknowledge “that the British grant system has substantial unintended consequences in that it generates a massive redistribution of resources without helping the most disadvantaged individuals as well as the less fortunate in the most disadvantaged places.”(p.404) Therefore, they support Hilber’s (2017) previously discussed view on unintended consequences in Section 2.1.5.1.2 (p. 53).

Similar to these studies, a vast amount of literature (Heinberg and Oates, 1970;

Church, 1974; McDougal, 1976; Reinhard, 1981; Richardson and Thalheimer, 1981;

Johnson and Lea, 1982; Yinger et al., 1988; Palmon and Smith, 1998; Barrow and Rouse 2004; Hilber and Mayer, 2009) have reported full (or over) capitalisation. However, these are mainly American studies focused on the residential market. Also, they have generally used either OLS or 2SLS, assumed incorrect functional form, and ignored simultaneity.

These, and other issues, especially in the research before 2000, are discussed by Yinger et al. (1998). For instance, Reinhard (1981) replicates Oates’ (1969 and 1973) studies and chooses a more appropriate functional form. Assuming a 3% discount rate, he implies that the capitalisation is 107% (Oates’ estimation is around 61%).

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