To own or to rent? The effects of transaction taxes on housing markets

Lu Han, L. Rachel Ngai and Kevin Sheedy

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Using sales and leasing data, this paper finds three novel effects of a higher property transaction tax: higher buy-to-rent transactions alongside lower buy-to-own transactions despite both being taxed, a lower sales-to-leases ratio, and a lower price-to-rent ratio. This paper explains these facts by developing a search model with entry of investors and households, households choosing to own or rent in the presence of credit frictions, and homeowners deciding when to move house. A higher transaction tax reduces homeowners’ mobility and increases demand for rental properties, which explains the empirical facts and leads to a lower homeownership rate. The deadweight loss is large at 111% of tax revenue, with more than half of this due to distorting decisions to own or rent.

Keywords: rental market; buy-to-rent investors; homeownership rate; transaction taxes (search for similar items in EconPapers)
JEL-codes: D83 E22 R21 R31 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2025-11-11
New Economics Papers: this item is included in nep-pbe and nep-pub
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Published in Review of Economic Studies, 11, November, 2025. ISSN: 0034-6527

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Related works:
Working Paper: To Own or to Rent? The Effects of Transaction Taxes on Housing Markets (2023)
Working Paper: To Own or to Rent? The Effects of Transaction Taxes on Housing Markets (2022)
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