1 An International Comparative Study on Housing Price and Property Tax Liabilities Sun-Tien Wu, Chun-Hao Yueh The 17th ERES Annual Conference, June 23-26, 2010, Milano, Italy

2 Contents of presentation Purpose of this study The conceptual framework of the study Empirical results Discussions Concluding Remarks

3 Motivation The increasing house price trend in U.S., U.K., Taiwan and H.K. is concomitant with decreasing interest rates and financial deregulation since 1990 ’ s up to the eruption of financial catastrophe two years ago. Does growing financial integration contribute to a common trend among the housing markets?

4 The house price index of selected countries

5 ‧ The figures above indicate that, the selected countries share a common upward trend of the housing price since ‧ However, each country has respective high or low upward trend and variation itself. ‧ Question: what factors other than the above common trend might influence the housing price?

6 Purpose of the Study ‧ To investigate whether there is a common trend of housing price index among the selected countries. ‧ To find out other factors such as property tax and interest rate which might have influences on the housing price index.

7 The Conceptual Framework of the Study We follow Otrok and Terrones (2005) to construct a dynamic factor model (DFM) comprising one common state variable – world common trend, and other independent country-specific factors to capture the house price trend of selected countries.

8 The independent country-specific factors include per-capita output, mortgage interest rate and effective tax rate which was measured as the property tax burden of each housing unit for our selected countries.

9 The reason for including property tax burden As well documented in housing research literature, property values are negatively affected by their related tax liabilities, a phenomenon that is often termed as capitalization in the literature. (e.g. Palm and smith, 1998; Krantz et al., 1982; and Lea, 1982)

10 The model is defined as follows: where represents a idiosyncratic component, which is distributed as i.i.d

11 The common factor evolves as an independent AR(p) process: Following Otrok and Terrones （ 2005 ）, we fix the variance of this innovation to unity as a normalization of the model:

12 Figure 1: The original series for selected OECD countries

13 The Figure shows that the trend for house prices in U.S., U.K. and Canada are pretty resembling to each other. The movements of per capita GDP and mortgage interest rate also look similar. This indicates that there must be a common trend among these selected OECD countries.

14 The effective property tax rate, on the contrary, are quite different for those countries, with U.S. and U.K. having the highest and lowest value, while Canada ’ s was in between. However, during our observation period, the movement of this variable, by and large exhibits a huntchbacked pattern except for the last two years.

15 Estimation Result(I):

16 Estimation begins with the restricted model where the model is simplified that only unobservable common trend is considered: The results show that the common trend is highly persistent and significant. Besides, the estimated for each selected OECD countries is also significantly positive.

17 This result mimics the finding of Chirinko et al. (2004) and that of Otrok and Terrones (2005) and may be interpreted as the fact that the U.S., U.K. and Canada have relative high level of financial openness so that there exists an evident common trend even though real estates are quintessential non-tradable goods.

18 Then, we add the country- specific factors to the selected countries that might have affected each country ’ s house price index besides their common trend. The result shows that house prices in selected OECD countries moved significant negatively with mortgage interest rate and property tax liabilities, implying that the capitalization effect works.

19 The actual and fitted house price for selected OECD countries

20 The figure shows the common trends of the house price in U.S., U.K. and Canada do not make significant difference whether the country-specific factors are included in the estimation or not. This implies that country-specific factors in those countries might have been affected by their international counterparts, as Otrok and Terrones (2005) asserted.

21 Figure 2: The original series for selected East Asia countries

22 House price moved quite differently for East Asia Countries. The discernible common trend for house prices is Less obvious than the case of the selected OECD countries. Observation points - case of East Asia country

23 Unlike the OECD case, the different movement patterns here implies that house price in these countries had been affected mainly by domestic factors. Income and interest rate series, however, exhibit somewhat similar trend as OECD countries, although different in patterns.

24 Estimation Result(II):

25 1.Coefficients for the common factor are all positive and significant, implying that house price in each country had been affected by their common trend. 2.The extent of influence of the trend here is much lower than the OECD case. 3.Like the OECF Case, the influences of interest rate and tax burden are obvious and consistent with our expectation. Points to note:

26 4.The influence of per capita GDP on house price is undecided--positive in Taiwan and Korea but negative in H.K. 5.Result looks better when country- specific factors are included in the estimation. Points to note:

27 The actual and fitted house price for selected East Asia countries

28 1.Fitted values deviate more from the actual values than the OECD case. 2.Fitted value failed to resemble the actual value in Korea. 3.Inclusion of country – specific factors improves the predictions in these Asian countries. Three points to make

29 Concluding Remarks 1.The common trend do affect house price movements in both cases. 2.The empirical result of this study attests more or less that of Chirinko et al.(2004)and Otrok and Terrones(2005) and succeeds only limited in attaining its object due to the ambiguous performance of the income variable. 3.Wish the problem of the income variable can be solved in future.

30 Thank You