The Economic Implications of House Price Capitalization: A Synthesis

Abstract

In this article I argue that the extent to which fiscal variables are capitalized into house prices has important economic implications. I synthesize an emerging literature that explores the conditions under which public and private investments and intergovernmental transfers are capitalized into local house prices and the broader implications of such capitalization. The main insights are: (i) House price capitalization is more pronounced in locations with strict regulatory and geographical supply constraints; (ii) capitalization can -under certain conditions -induce the provision of durable local public goods and club goods; and (iii) capitalization effects -which are habitually ignored by policy makers -have important adverse consequences for a wide range of policies such as intergovernmental aid or the mortgage interest deduction. JEL classification: D71, R21, R31.Keywords: House price capitalization, homeownership, local public goods, club goods, land use regulation, land and housing supply, incentives to invest, redistribution. 1 IntroductionMunicipalities and neighborhoods differ enormously in their levels of local public good provision, accumulation of social capital or private investments in the housing stock. Some localities -often suburbs that surround large and prosperous cities -have excellent public schools and other public services, as well as close ties among helpful neighbors. These places are typically also exceptionally well maintained. Other locations, however, are confronted with appalling public services, non-existing or dysfunctional social networks and decay. Inner city neighborhoods in less prosperous cities or more rural locations are often hampered by some or all of these problems.One potential explanation for these stark differences in local public and private investments is that they are fundamentally caused by local differences in natural amenities (e.g., scenic views or access to nice public parks) and resulting sorting by income. If households appreciate natural amenities, they will bid up house prices (and rents) in locations with more desirable characteristics. And since the most affluent households can afford to live -and own -in the highest-amenity locations, holding other things constant, the outcome of the sorting process will likely be that the wealthiest households own the houses in the highest amenity places. The presence of affluent homeowners in turn will likely generate positive externalities (including fiscal externalities and peer effects), ultimately resulting in better local public services (including schools with better outcomes), stronger social ties, and -since affluent residents are more likely to own their home -better maintained housing in places that are otherwise more desirable as well.Yet public good-and club good-provision is not always superior in locations with nice natural amenities or put differently: often places with excellent public good-or club goodprovision are not very exceptional in terms of their natural amenities. Various other factors...

The Effect of Legalizing Retail Marijuana on Housing Values: Evidence From Colorado

“…There exists a large literature on assessing the effects of public programs through local housing markets . For example, Hilber () recently reviews the literature that examines how fiscal differentials (e.g., differences in local public services and property taxes) are capitalized into housing values as housing market participants respond to the perceived benefits and costs by “voting with their feet.” Following these studies, we present a simple conceptual framework to illustrate the capitalization effects of legalizing retail marijuana, by focusing on housing market participants who are most likely responding to the legalization: new migrants and tenants on the demand side, as well as homeowners on the supply side…”

The Impact of Supply Constraints on House Prices in England

“…In such a setting, spatial differences in local supply constraints (or in the supply price elasticity) only affect the amount of new construction but not the degree to which local demand shocks are capitalised into house prices. See Hilber () for further discussion.…”

Hedonic analysis and time‐varying capitalization: An application using school quality

“…Specifically, we check for whether the countercyclical pattern is due to households "trading down" from private schools as argued by Gabriel et al (2016). We also check for whether the countercyclical capitalization of school quality is due to the kinked housing supply hypothesis which has been argued by several studies in the literature (Glaeser & Gyourko, 2005;Hilber, 2017), but we find little support for these propositions in our data.…”

“…The kinked housing supply hypothesis has been used as argument for the persistent urban decline in U.S. cities like Detroit, Michigan (Glaeser & Gyourko, ). Hilber () shows that the hypothesis of a kinked housing supply has important implications for the capitalization of local public goods. The study shows that housing prices will be more responsive to a positive demand shock due to an increase in a local public amenity, such as school quality, when the housing supply is inelastic.…”