Recurrent property taxes may help to reduce house price volatility

• Central Bank Economic Letter finds that recurrent property taxes can, over time, help to mitigate downside risks to house prices.
• Such taxes may also provide a stable source of revenue for government, as they are less likely to be affected by the economic cycle.
• Revenue from recurrent property taxes, as a proportion of national income, is lower in Ireland than average.

The Central Bank of Ireland has today published an Economic Letter, (PDF 918.87KB)“Recurrent Property Taxes and House Price Risks” (PDF 918.87KB), authored by Martin O’Brien, David Staunton, and Michael Wosser. Based on a cross-country analysis, the Letter examines recurrent property taxes and the role these taxes may play in promoting more stable growth in house prices over time. It also considers whether these taxes can provide a more stable source of revenue for governments, as they are generally less affected by changes in the economic cycle.

Recurrent property taxes are those levied regularly on a selected category of properties. In Ireland, these taxes include the Local Property Tax (LPT) and the Residential Zoned Land Tax. The Letter finds that, overall, Ireland’s tax revenue as a share of national income is slightly lower than the average across most OECD countries. However, revenue from recurrent property tax as a proportion of national income – a measure of the overall incidence of the tax – is significantly lower in Ireland than average.

Turning to the role of recurrent property taxes in relation to house price changes, the Letter finds that a higher incidence of recurrent property taxes may help to mitigate volatility in house prices. In particular, the findings suggest an association between a higher incidence of recurrent property tax and lower downside-risks to house prices. Overall, cross-country analysis suggests that recurrent property taxes can play a positive role in promoting more stable growth in house prices over time.  In this respect, they can complement the role of macroprudential policy (such as borrower-based measures in the mortgage market) in promoting wider financial stability.

The Letter further considers whether recurrent property taxes can provide a more stable income source for governments. It notes that cyclical taxes, such as individual or corporate income tax and consumption-based taxes, tend to rise and fall in line with economic growth. This can pose challenges for governments in times of constrained growth, when public finances may already be under pressure. By contrast, revenue from recurrent property taxes, as they are typically designed in most countries, tends to remain stable, due in part to the frequency of revaluation of properties and the use of valuation bands for calculating tax liability. This suggests that such taxes can provide a stable source of revenue and one that is less likely to be affected by the economic cycle.

The specific design and calibration of taxes at any particular point in time is a complex task for governments and legislators. In the course of doing so, policymakers have to consider a much wider set of costs and benefits than those considered within this Letter. However, this analysis and its findings on the potential benefits of recurrent property taxes can form part of that broader consideration.

ENDS

Notes to Editor

In assessing the association between recurrent property taxes and house price volatility, this letter draws upon a methodology called the House Price at Risk (HPaR) model. This was first discussed in Box C of the (PDF 1.88MB)Central Bank’s Financial Stability Review (2020:II) (PDF 1.88MB) and is set out in more detail in Appendix A to the Letter. The output of the HPaR model is a distribution of possible outcomes for house price growth in a range of countries over the following four quarters, based on existing conditions in the respective market.