Property Taxes and Housing Allocation Under Financial Constraints

Abstract

Property taxes impact the housing distribution across generations. Low property taxes lead to concentrated ownership among elderly empty-nesters, limiting housing for financially constrained young families. Conversely, high property taxes act as a "forced mortgage,'' reducing upfront downpayments and enabling greater homeownership among younger households. We show in an overlapping generations model that raising property taxes in low-tax California to match those in higher-tax Texas increases homeownership in California by 4.6% and among younger households by 7.4% in steady state. Asset taxes can reallocate housing to higher-valuation households in the presence of financial constraints, providing an independent rationale for property taxes.

Keywords: housing affordability, housing inequality, property taxes

JEL Classification: H71, R21, H24, J11