Research: Transfer tax reduces mobility

Real estate transfer tax reduces mobility both within and across regions, finds a recent study. The tax causes households to live in housing unsuitable to their circumstances. The adverse effects of the tax may also reflect on the functioning of the labour market

Helsingin Arabia. Kuva: Viivi MyllyläPhoto: Viivi Myllylä

The study carried out by VATT Institute of Economic Research and the Executive Office of the City of Helsinki yields new data on the impact of the real estate transfer tax in Finland.

In March 2013, the transfer tax applicable to housing co-operatives rose from 1,6 per cent to 2,0 per cent. The transfer tax applicable to single-family houses, on the other hand, remained unchanged, at 4,0 per cent. Furthermore, the tax base for the transfer tax in housing co-operatives was expanded to cover the co-op’s loan in addition to the apartment’s sale price.

The study employed the change in the transfer tax as what is referred to as a natural experiment. This allows for isolating the impact of the tax from other factors having an effect on mobility.

The research compared the inclination to relocate among those living in single-family houses and the shareholders living in housing co-operatives before and after the tax reform. The hike in the transfer tax reduced mobility among those owning and living in a housing co-op unit by approximately 4.3 per cent. The research also revealed that the tax reduces mobility both within and across labour market areas.

As a result of the transfer tax, households tend to live in apartments unsuitable for them in terms of size or location, for example, more often. Because of the tax, the housing stock is in inefficient use, a fact which reduces well-being. According to the research, this is a significant, if invisible, cost of the transfer tax.

The project relied on Statistics Finland’s complete individual-level data sets for 2006–2015, transfer tax data and the real estate data collected by the Central Federation of Finnish Real Estate Agencies (KVKL).

Transfer taxes are also common in other countries, and according to the results of international studies, they reduce transaction volumes in the housing market. However, no domestic empirical research data on the impact that transfer tax has on the housing market and the mobility of households has previously been available.

The research was carried out as part of the implementation of the Government’s 2017 plan for analysis, assessment and research. The research was conducted by VATT Institute of Economic Research and the unit for Urban Research and Statistics at the Executive Office of the City of Helsinki.

For further information on the Government’s analysis, assessment and research activities, go to http://tietokayttoon.fi/en/frontpage

Research:

Effects of Real Estate Transfer Taxes: Evidence from a Natural Experiment
Publication Series of the Government's analysis, assessment and research activities 17/2018

More information:

Research Director Essi Eerola tel. +358 295 519 407 [email protected]
Associate Research Professor Teemu Lyytikäinen tel. +358 295 519 431 [email protected]
Associate Research Professor Tuukka Saarimaa tel. +358 295 519 444 [email protected]
Senior Researcher Oskari Harjunen tel. +358 40 334 47 99 [email protected]