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The effect of real estate purchase subsidies on property prices

Carla Krolage ()
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Carla Krolage: ifo Institute

International Tax and Public Finance, 2023, vol. 30, issue 1, No 7, 215-246

Abstract: Abstract This paper assesses to which degree housing purchase subsidies are capitalized into property prices. Using a large-scale micro-dataset on German house prices, I exploit the introduction of a new subsidy scheme in the state of Bavaria. My difference-in-difference estimations at the Bavarian interstate border indicate that the prices of single-family homes increased by approximately 10,000 euros more in Bavarian border regions. This is consistent with a full capitalization of the subsidy. No effect is found for apartments, whose purchasers seldom qualify for the subsidy. A heterogeneity analysis confirms that the price effect is larger in segments of the real estate market with a higher exposure to the subsidy scheme. I also provide suggestive evidence that the subsidy scheme slightly stimulated construction activity. Overall, my results indicate that instead of making house purchases more affordable for families, the subsidy scheme led to a rise in house prices and mainly benefited sellers of properties.

Keywords: Real estate market; Housing subsidies; Capitalization of subsidies; Property prices (search for similar items in EconPapers)
JEL-codes: H22 H24 H71 R31 R38 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10797-022-09726-0

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Handle: RePEc:kap:itaxpf:v:30:y:2023:i:1:d:10.1007_s10797-022-09726-0