Can Property Taxation Fix China’s Housing Market?: A Regression Discontinuity Analysis

Abstract

How does the housing market respond to a newly imposed value-based property tax? Based on individual property transaction data spanning seven years, we investigate the repercussions of a new property tax on the local housing market in Chongqing, China. In particular, we adopt a fuzzy regression discontinuity approach to examine the impact of the tax policy on house prices, transaction volumes, and the broader social welfare. We find that the property tax in Chongqing has not caused a reduction in house prices, but it has made a non-trivial contribution to local public finance for public housing programs. Our findings suggest that the property-tax-capitalization hypothesis is not supported in Chongqing’s context, although the tax improves wealth redistribution.

Keywords:

• Property tax
• housing price
• regression discontinuity
• policy evaluation

Acknowledgment

We are grateful to Mr. Henghui Ye for his research assistance.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 The decoration variable is derived from the original data, which categorizes apartment into four levels of interior decoration: no deco, simple deco, refined deco, and others. For example, no deco apartments are homes without any interior decoration. These apartments have no surface coating on walls, floors, and ceilings, and no interior doors, sanitary equipment in the bathroom, kitchen fittings, lighting fixtures, or balcony sealing. Refined deco apartments are finely decorated with attractive architectural elements. These units typically feature wooden storage cabinets, well-appointed kitchen and bathroom walls and floors, and professionally installed ceiling lamps. Essentially, they are move-in ready units designed for immediate occupancy. Simple deco apartments have a decoration level in-between.

2 The MSERD method is used to select the optimal bandwidth in regression discontinuity designs. The MSERD method aims to minimize the mean squared error of the estimated treatment effect.

3 During the data cleaning process, we deleted apartment sizes below the 1% and above the 99% quantiles. Thus, the sample includes property sizes ranging from 30 to 200 m².

4 The McCrary density test is a statistical test used to assess the continuity of the density of a running variable at a cutoff point in an RD design. It was developed by Justin McCrary in 2008 (McCrary, 2008). The test is often used to check for manipulation of the running variable, which can undermine the validity of the RD design.

Additional information

Funding

This study was financially supported by the University of Hong Kong Seed Fund for Basic Research (Project Code:109000323).

Notes on contributors

Xin Li

Xin Li is an Associate Professor in the Department of Architecture and Civil Engineering at the City University of Hong Kong. Her research interests focus on urban and regional economic development and urban policy issues.

Kyung-Min Nam

Kyung-Min Nam is an Associate Professor in the Department of Urban Planning and Design at the University of Hong Kong. His research interests focus on spatial planning and environmental policy, and he has widely applied econometrics, computable general equilibrium models, and GIS tools to his empirical research.

Zheng Chang

Zheng Chang is an Associate Professor in applied economics at the BNU-HKBU United International College. His research focuses on urban development in China and covers a wide range of subjects, including transportation development, land and housing market, and urban environmental sustainability.