Capital Gains Tax and Housing Price Bubble: A Cross-Country Study

P





olicy makers in housing sector seeks to use instruments by which they can control volatility of housing price and prevent high disturbances of the bubble and price shocks, or at least, reduce them. In the portfolio and speculation theories, it is emphasized that speculative demand for housing is the main cause of shocks and price volatilities in the sector. The theory of housing price bubble also describe the dominance of speculative demand and importance of asset demand in the composition of housing demand as the main cause of housing price shocks. Therefore, capital gains tax, which is used in most developed countries, is regarded one of the strong instruments to control and direct housing speculation to minimize damages to the sector. In this study, an attempt has been paid to investigate the effect of capital gains tax on housing prices using panel data for 18 countries (including Iran) over the period from 1991 to 2004. The results show that the efficiency of capital gains tax in countries with capital gains tax system is higher than that of countries lacking the system. In all estimated equations, the real capital gains tax and its share of total tax, contribute significantly to the stabilization of housing prices and controlling housing price volatility. The intermediate objectives of monetary policy, including pegged interest rates and liquidity play a significant role in achieving the ultimate goals of monetary policy such as the housing price bubble and inflation. In addition, the prices of assets have been among the factors affecting housing prices in countries under study.