The effect of change in the property tax: evidence from the Swedish
taxation reform*
Timotheos Mavropoulos1
This version: October 16, 2014
Preliminary draft
Abstract
The paper investigates the effect of the property taxation reform
introduced in Sweden after April 2007 on the market price of the
affected properties (one-family houses). Inference is focused on
discount rates, growth rates and the implied degree of tax
capitalization. Stronger results for the capital compared to the rest of
the country underline the importance of land scarcity for the degree
of tax capitalization.
*I would like to thank Peter Englund for his advice during the completion of this term paper and encouragement
whenever I found obstacles in proceeding. I would also like to thank Valueguard AB and in particular Lars-Erik Ericson
for his support in data extraction process. Gratitude goes to participants of the NFN PhD conference 2014 and Kristian
Miltersen (Copenhagen Business School). 1
Stockholm School of Economics (email: [email protected])
1
Introduction
The degree of capitalization of property taxes and its effect on the market price of properties is an
important subject to investigate. Property tax reductions shift the tax burden from current homeowners to
the future ones. In the current paper I try to investigate if the tax effects are rationally accounted for by the
market. In particular, it is interesting to know to which degree the Swedish property market for one-family
houses capitalizes the property taxes, hence revealing the information about the expectations on the future
taxation treatment of such properties. I will analyze a tax reform announced in April 20071. Until 2007 the
tax was proportional to house value. From April 2007 a cap on the tax in SEK was introduced. This meant a
sharp reduction of the tax for most properties in Stockholm and other major markets, but no reduction in
other parts of the country. Though the magnitude of the tax effect is not obvious, it is clear that it should
differ across different types of properties depending on their assessed value (e.g. major cities versus
provincial areas).
The research literature on the capitalization of property taxes is rather scarce and mainly
concentrated on the US property tax system (Bradley 2011, Bradbury et al. 2001). Most of the literature is
cross-sectional in nature and asks whether differences across jurisdictions in taxes and local amenities get
capitalized in house prices. Few studies deal with the dynamic issue of price effects due to a tax reform. A
recent example is a study by Bradley 20112, where the effect of tax obligations of new homebuyers is
explored in connection to the sale prices using data on homes sold in Michigan for the 1997-2007 period.
Introducing a cap on the taxable values of the real estate properties results in a substantial variation in tax
obligations for existing homeowners vis-à-vis new entrants to the housing market. The study of taxation cap
can reveal the degree of real estate market efficiency. In particular, if the existing homeowners with lower
tax obligations due to the introduced cap are overcompensated as if such a cap is maintained permanently,
the market is considered highly efficient. This is important information from the policy decision point of
1 A more detailed description of the reform history is given in the later section.
2Bradley Sebastien, Capitalizing on Capped Taxable Values: How Michigan Homebuyers are Paying for Assessment
Limits, University of Michigan, 2011.
2
view. Elinder and Persson (2014), while exploring price responses and capitalization degrees from the
Swedish real estate reform present results largely inconsistent with capitalization theory, emphasizing the
role of behavioral theories of bounded rationality as a key explanation. I will attempt to contribute to the
literature by exploring the effect of the taxation cap introduction in Sweden in 2007 while emphasizing the
rational explanations, taking into account the implied discount rates and degrees of tax capitalization.
I proceed with reform history in the context of property taxation environment in Sweden, refer to
capitalization theory, data, sample selection and methodology, present results and conclusion.
Property taxation in Sweden
To carry out property taxation the Tax Agency in Sweden completes real estate assessment
according to a rolling schedule triennially, with different types of assessment units like one- or two-dwelling
buildings, apartment buildings, units for agriculture and forestry, etc. The assessed value is set at 75% of the
market value. From 2007, as will be described in a later section, a reform was introduced with government
property tax on dwellings having been abolished and replaced by a local real estate fee. Since then the
charge for single-family houses should not exceed 0.75% of the tax assessed value and reachingin total
SEK6.387 billion in 2010. It should be noted that taxes on property are the relatively insignificant as a source
of government tax revenue in Sweden with 2.4% share of total tax revenues as of 20093.
Reform history
The Swedish Homeowners Association (VillaägarnasRiksförbund) - a national organization with
322.000 members (households) throughout Sweden promoting the interests of homeowners has been
lobbying for years to abolish the property taxes on one-family houses.
In 2007 Fiscal Policy Bill of proposed guidelines on the economic and budgetary policy (Regeringens
proposition 2006/07:100), dated 12th of October 2006, it was mentioned that the property tax will be at
3http://www.skatteverket.se/download/18.3684199413c956649b57c0a/1361442608379/10413.pdf
3
some point abolished but no details were provided (2006/07:1, volym 1, s. 147). The projection was that
“the reform will be implemented during fiscal year 2008”.Later on, the Proposition 2006/07:100 dated 10th
of April 2007mentioned that the property tax will be abolished (effectively from the taxation year 2008) and
substituted with a “fee”(“fastighetsavgift”). The proposal was to make it 0.75% of Tax Assessed Value up to
SEK4.500, with the details to be announced and discussed until the fall. It was also mentioned that the
reform would be funded "within the sector" but did not describe exactly how. Finally, Proposition
2007/08:27 dated 25th ofOctober 2007 announced the actual reform with the cap at SEK6.000 (increased
fromSEK4.500 announcedpreviously). The funding of the reform was planned through an increase of the
capital gains tax from 20% to 22% and the introduction of an 0.5% interest charge levied on the tax liability
when the capital-gains tax can be rolled forward, which is the case when it is reinvested in housing. From the
reform history it can be inferred that the reform dating is rather fuzzy, thus a definite pre-reform period can be
determined as the earliest possible period ranging from a newly-conducted assessment in 2006 (i.e. January
2006) till the earliest possible rumors about the reform. The problem is that the mentioned rumors may have
already started from October 2006, leading to a decision of making January 2006 the earliest possible pre-
reform period to examine the effect of the 2007 reform on a set of properties assessed during 2006 and
onwards.
Tax capitalization theory in the context of Swedish taxation reform
The standard model of property tax capitalization is presented in this section4. This model will be
modified to accommodate the effects of the Swedish property tax reform, and in particular the
discontinuous tax treatment after October 2007 of properties sold after the reform. A description of the
model departs from the idea that market value of the property equals to the present value of the stream of
housing services net of property tax obligations and then introduces the necessary features to account for
4To refer to a more thorough presentation of the basic model, see Ross and Yinger (1999) as well as Yinger(2005)
4
the reform. Assuming that constant continuous housing services R5 over the infinite lifetime of the house
embody all associated public services and other amenitiesnet of tax payment, then we can investigate the
effect of the reform in the following way. Before the reform the property tax was equal to 1% of the tax
assessed value, or 0.75% of the market value6. After the reform the property tax equals to 0.75% of tax
assessed value with a cap of SEK6.000 or, in terms of assessed value, SEK800.000. To illustrate the reform
effect on the tax payment, observe the graph below:
Graph 1. Tax reform illustration: tax assessed value in SEK plotted against corresponding tax obligations in SEK
The cap introduced by the reform establishes a decrease in tax obligations proportional to the properties’ tax assessed
value.
Expressing this in terms of market value before the reform with the real discount factor 𝑟 − 𝑔,
where constant growth rate of housing services g and the constant discount rate𝜌 are assumed, one gets:
MV0 =R0
ρ − g + 0,0075=
TAV
0,75
while after the reform, for the properties below SEK800.000 in tax assessed value:
5 Note that this assumption has implications for the resulting magnitude of tax capitalization. When land is scarce, the
total supply of land may be assumed to be fixed, with the long-run supply having positive slope. This, together with the long-run output growth in the economy which is likely to raise the total demand for land, is contributing to the increasing relative prices of land used for housing purposes, and hence the market price of houses. The housing services R in this case should adjust downwards due to an increased supply. As a result, the current theoretical calculations may overstate the resulting capitalization. 6Typically the assessment process aims to determine the assessment value at 75% of the market value one year before
the assessment is conducted. Property owners fill in the detailed questionnaire where the characteristics of the house via hedonic indices determine the property tax assessed value.
02000400060008000
100001200014000
Tax
ob
ligat
ion
in S
EK
Tax Assessed Value in SEK
Tax Reform Illustration
Tax before
Tax after
5
MV′ =R0
ρ − g + 0.75 ∗ 0,0075=
TAV(ρ − g + 0,0075)
0,75(ρ − g + 0.75 ∗ 0,0075)
and for the properties above SEK800.000 in tax assessed value and the tax cap of SEK6.000 (assuming the
cap also grows at rate 𝑔):
MV′ =R0
ρ − g−
6.000
ρ − g=
TAV(ρ − g + 0,0075)
0,75(ρ − g)−
6.000
ρ − g
The difference before and after the reform for the above SEK800.000 properties is thus:
MV′ −𝑀𝑉0 =TAV ρ − g + 0,0075
0,75 ρ − g −
6.000
ρ − g−
TAV
0,75=
0,01TAV
ρ − g−
6.000
ρ − g
Expressing the difference before and after in terms of a ratio, we have for the above SEK800.000 tax
assessed value properties:
𝑀𝑉′
𝑀𝑉0=
TAV (ρ−g+0,0075)
0,75(ρ−g)−
6.000
ρ−g
TAV
0,75
= 𝜌 − 𝑔 + 0.0075
𝜌 − 𝑔−
6.000 ∙ 0,75
TAV(𝜌 − 𝑔)
A table presenting the above ratio of capital gain MV ′
MV depending on different values of the real discount
factor ρ − g and the tax assessed value TAV is given below:
Table 1. Ratio of capital gain due to reform for the properties with the tax assessed value above SEK800.000
ρ-g
TAV
800.000 1.000.000 1.500.000 2.000.000 5.000.000 10.000.000 ∞
0,01 1,188 1,300 1,450 1,525 1,660 1,705 1,750
0,02 1,094 1,150 1,225 1,263 1,330 1,353 1,375
0,03 1,063 1,100 1,150 1,175 1,220 1,235 1,250
0,04 1,047 1,075 1,113 1,131 1,165 1,176 1,188
0,05 1,038 1,060 1,090 1,105 1,132 1,141 1,150
0,075 1,025 1,040 1,060 1,070 1,088 1,094 1,100
0,1 1,019 1,030 1,045 1,053 1,066 1,071 1,075
The table shows that with increase in the tax assessed value TAV the ratio of capital gain 𝑀𝑉′
𝑀𝑉becomes very
sensitive to the discount rate ρ-g.Note that after the reform, the difference in market values between the
above SEK800.000 and below SEK800.000 tax assessed value properties is:
MV>800′′ − MV<800′
′ =TAV ρ − g + 0,0075
0,75 ρ − g −
6.000
ρ − g−
TAV ρ − g + 0,0075
0,75 ρ − g + 0.75 ∗ 0,0075 =
=0,0075 ρ − g + 0,0075
ρ − g ρ − g + 0.75 ∗ 0,0075 TAV−
6.000
ρ − g
6
The theoretically derived relation above will be connected to the ones derived from regression
analysis in the next section.
Investigating the tax gain after the reform we should note that there are two sources of this gain to
be capitalized: a 0.25%TAV decrease from a 1%TAV tax and the cap itself. Since after the reform the tax on
properties is 0.75%TAV with the cap of SEK6.000, the cap in SEKto be capitalized is:
Cap = 0.75% ∙ TAV − 6000
For properties with TAV above SEK800.000, thatimplies in terms of capitalization in SEK:
Tax Gain per year = 0.25%TAV+ 0.75%TAV− 6000 = 1%TAV− 6000
or
Tax Gain =0,01TAV
ρ − g−
6.000
ρ − g
as noted previously. Since the tax assessed value can be assumed unchanged by the reform (it is
adjusted triennially), the driving force behind a change in market value for the properties with TAV above
SEK800.000 is the capitalized tax gain 0,01TAV
ρ−g−
6.000
ρ−g.
It should be noted that while the cap introduced by the reform could be assumed to stay constant
and not grow at rate g , so we could rewrite the tax gain as 0,01TAV
ρ−g−
6.000
ρand infer about 𝜌 and 𝑔 separately.
However, the policy in the aftermath of the reform (as of 2014) has indeed made an increase in the initially
proposed cap and in particular made the cap indexed to a disposable income index, with the 2014 cap being
SEK7.074. That implies annual cap growth rate of 2.78245%, revealing information about g that can be
further used in the analysis.
Furthermore, assuming the degree of tax capitalization β, one can express the tax gain as
β 0,01TAV
ρ−g−
6.000
ρ .
Note that since the discount rate ρ and the degree of tax capitalization β both enter the formula for
the capitalized tax gain one needs to hold either of the two fixed to infer about the degree of tax
capitalization or the implied real discount rate correspondingly. That is, one can infer about the degree of tax
7
capitalization by assuming particular real discount rates constant or, holding the assumption of full tax gain
capitalization, infer about the implied real discount rates.
Data and method
The data comes from transactions on all individual homes (one-family houses) between individuals
from 2007 until the latest available year from the real estate agencies (SvenskMäklarstatistikAB) when the
transaction was made.
The question is whether the market during the period of 2007-2008 fully capitalizes the property tax
is by no means simple to answer, given the fact that the discount rate cannot be determined not having
previously assumed the degree of tax capitalization and, analogously, to determine the degree of tax
capitalization one should assume a particular discount rate. One could in principle derive the implied
discount rate while assuming full degree of tax capitalization or, having assumed particular discount rates,
investigate the degree of tax capitalization implied from the property market values. In addition, a crucial
step is to compare the tax capitalization in provincial areas versus the capital city, since the testable
prediction is that in Stockholm the tax capitalization will be more profound due to land scarcity and higher
market values.
Sample selection
The whole sample consists of 86.830 properties sold in the years 2006-2008 and assessed in 2006.
Note that the number of properties sold that are above and below SEK800.000 are increasing during 2006
due to the fact that their relative share in the market- compared to the properties assessed in 2003 - is
increasing. However, in the sense that the differences between the above SEK800.000 group and below
SEK800.000 group are not affected by the assessment year per se, the sample of properties assessed in 2006
is not systematically different from the sample assessed in 2003 (consult Appendix for the details).
8
Graph 2. Illustrating the dynamics of the number of properties sold quarterly during 2006-2008 and assessed in 2006.
From graph 2 above it can be inferred that the relative share of the properties below and above SEK800.000
remains relatively stable in the reform period 2007-2008, and for the above SEK800.000 group is 52%.
Graph 3. Illustrating the relationship between the number of properties sold and the median market value
0
2000
4000
6000
8000
10000
12000
14000
Number of properties above and below SEK800.000
<800.000
>800.000
0
500000
1000000
1500000
2000000
0
2000
4000
6000
8000
10000
12000
14000
Number of properties and median Market value by quarter
Number of properties
Median MV
9
Graph 4. Illustrating the relationship between the number of properties sold and the median tax assessed value
The graphs 3 and 4 show a slight decreasing trend in the market value and the tax assessed value
during 2006. Comparing in to the data available from SCB, one notes that despite a slight decrease the
median TAV value is in line with the one mentioned by SCB7. One can observe a slight increase in the median
market value of properties in the treatment group after the reform. This slight increase actually occurs one
quarter prior to the reform and persists for the period until third quarter of 2008:
Graph 5. Illustrating the relationship between the market value of the properties with the tax assessed value of below and above SEK800.000
7http://www.scb.se/en_/Finding-statistics/Statistical-
Database/TabellPresentation/?layout=tableViewLayout1&rxid=c576218a-468f-4b11-85ba-d5704813a83d
0
200000
400000
600000
800000
1000000
1200000
0
2000
4000
6000
8000
10000
12000
14000
Number of properties and median Tax assessed value by quarter
Number of properties
Median TA value
0
500000
1000000
1500000
2000000
2500000
3000000
20
06
01
20
06
02
20
06
03
20
06
04
20
07
01
20
07
02
20
07
03
20
07
04
20
08
01
20
08
02
20
08
03
20
08
04
Mar
ket
Val
ue
Time (Quarters)
Median Market Value development over time for properties below and above SEK 800.000
MV (TAV<800000)
MV (TAV>=800000)
10
Empirical analysis
Note that the degree of tax capitalization depends on supply elasticity. Poterba (1984) underlines
that specification of the relationship between inputs of land and structures and outputs of housing services R
is almost impossible to obtain. However, land scarcity in the capital and other major city areas vis-à-vis
provincial areas is indicative for the corresponding difference in the degree of tax capitalization. In
Stockholm, for example, the degree of capitalization is expected to be much higher compared to provincial
areas or the whole country. The results for Stockholm presented later are supporting this prediction for the
degree of tax capitalization.
In the methodology applied in the study the event (taxation reform) is a change in government
policy and considered to be exogenous hence the data arise from a natural experiment. Note however the
fuzzy timing of the reform which prevents a clear distinction between the pre-reform and post-reform
periods.
Taking a sample of properties assessed in a particular year before the reform (2006) one can
investigate if the market value of the properties with TAV above SEK800.000(“treatment group”) was
affected disproportionally by the reform.
Presenting the results for Stockholm observe that all of the observations belong to the above
SEK800.000 group. The following basic model in levels is first investigated:
MVi = β0 + β1T + εi (1)
Where T denotes monthly time dummies for the whole period (2006-2008). Since this is a simple
regression on a monthly dummy variable, the intercept is the average market price for single family houses
in the base month of January 2006 (SEK 2.859.167 from the Table 2 in the Appendix) and the coefficient β1
on T is the difference in the average market price between houses sold in the base month of January 2006
and those sold in the month of the reform period, with the estimate indicating that on average, properties
sold in for example, April 2007 are sold for SEK 1.425.000 more than those in the base moth of January 2006.
11
Adding the tax assessed values variable and the corresponding interaction term to the above basic
model in levels, the following model is then estimated:
MVi = β0 + β1T + β2TAVi+β3T ∙ TAVi + εi (2)
It makes possible a direct comparison to the theoretically derived difference in the previous section.
Recall that:
MV′ −𝑀𝑉0 ==0,01TAV
ρ − g−
6.000
ρ − g
Thus β1 coefficient is related to 6.000
ρ−g while β3 coefficient is related to
0,01
ρ−g , making possible an
inference about the implied discount rates and the degree of tax capitalization for Stockholm. In addition,
with the help of coefficient β1 we can infer about the discount rate ρ, assuming the cap grows at rate
g=2.78245%, while the coefficient β3also provides inference about discount rate ρ assuming full degree of
tax capitalization.Predicted negative sign for the coefficient β1is observed. Jump is noticed from January
2007 onwards, and acquires maximum magnitude around the time of Proposition 2006/07:100 dated 10th of
April 2007 that mentioned that the property tax will be abolished. It should be noted that in terms of tax
assessed values, the 1SEK of the tax assessed value of the properties sold in the reform period has translated
in an at least 0.5SEK increase of market value of those properties compared to the base month.
For the implied discount rates and the degree of tax capitalization for Stockholm,observe the table
below for ρ,ρ being consistent at around 4% inferring from both coefficients β1and β3for the period of the
Proposition 2006/07:100 dated 10th of April 2007 which mentioned that the property tax will be abolished
(effectively from the taxation year 2008) and substituted with a “fee” (“fastighetsavgift”):
Month (2007) ρ= g +6000/β1 ρ = g +0.01/β3
Feb 3,62% 4,38%
Mar 5,68% 5,13%
Apr 4,77% 4,57%
May 3,54% 4,02%
Jun 3,66% 4,11%
12
While for the period around Propostion 2007/08:27 dated 25 October 2007 which announced the
actual reform with the cap at SEK6.000:
Month (2007) ρ= g +6000/β1 ρ = g +0.01/β3
Aug 3,77% 4,30%
Sep 6,19% 4,81%
Oct 3,54% 4,07%
Nov 3,64% 4,49%
Dec 3,57% 4,52%
Observe positive growth implied by the assumed full degree of tax capitalization and a relatively
stablereal discount rate of 4% implied from the market.
Now note the implied degree of tax capitalization βimplied from two different sources, in particular:
β =β1(ρ−g)
6000 and β =
β3(ρ−g)
0,01 :
For implied degree of tax capitalization from an assumed discount rate and coefficient β1, that is
β =β1(ρ−g)
6000 with g= 0,027825we have:
Month (2007)
ρ
3,50% 4,00% 4,50%
Aug 72,13% 122,39% 172,65%
Sep 21,02% 35,66% 50,31%
Oct 94,53% 160,41% 226,28%
Nov 83,79% 142,18% 200,57%
Dec 91,02% 154,44% 217,86%
While the implied degree of tax capitalization from an assumed discount rate and coefficient β3, that is
β =β3(ρ−g)
0,01 with g= 0,027825 we have:
Month (2007)
ρ
3,50% 4,00% 4,50%
Aug 47,36% 80,36% 113,36%
Sep 35,38% 60,03% 84,68%
Oct 55,68% 94,48% 133,28%
Nov 41,90% 71,10% 100,30%
Dec 41,33% 70,13% 98,93%
13
Observe that the degree of tax capitalization is proportional to the increase in the difference of real
discount rate and the growth rate as well as undercapitalization for comparatively smaller discount rates.
For the entire country a following regression is run:
MVi = β0 + β1TAVi + β2Tr + β3T+β4Tr ∙ TAVi + β5T ∙ TAVi + β6Tr ∙ T + β7Tr ∙ T ∙ TAVi + εi(3)
where T denotes monthly time dummies for the whole period (2006-2008) and Tr dummy variable for the
Treatment group (properties above SEK800.000), one infers to what degree the tax gain is capitalized into
the market value.
Observe that the coefficient β6 is the double interaction term of the monthly dummy with the
affected properties (treatment group) dummy while the coefficient β7 is the triple interaction term of the
monthly dummy with the affected properties (treatment group) dummy and their tax assessed value TAV.
The coefficientβ7showsthe average monthly increase in market value per 1SEK in tax assessed value
of the houses due to the reform, provided that properties with tax assessed values below and above SEK
800.000 did not appreciate for other reasons.
Coefficients β6 and β7also yield the degree to which tax gain is capitalized, i.e. the degree to which
tax gain is translated into the increase of the market value of the properties in the treatment group given
particular discount and growth rates.The estimates of these coefficients are to be compared to the
theoretical difference: 0,0075 ρ−g+0,0075
ρ−g ρ−g+0.75∗0,0075 TAV−
6.000
ρ−gfrom page 5. In particular, 0,0075 ρ−g+0,0075
ρ−g ρ−g+0.75∗0,0075 is to be related
to β7 while β6to 6.000
ρ−g. In addition, with the help of coefficient β6 we can infer about the discount rate ρ,
assuming the cap grows at rate g=0,0278245, while the coefficient β7also provides inference about
discount rate ρ, assuming full degree of tax capitalization.
After the initial reform, that is from 12 October 2006 as mentioned in Government proposition
2006/07:1 where the property tax was decided to be abolished, we would expect a kink in the relation
between MV and TAV, proportionality up to SEK 600.000 (due to initially discussed cap of SEK 4.500) and a
steeper slope above. Two sets of coefficients for the interaction TAV and time will be estimated, one for TAV
14
below and one for TAV above SEK600.000 (“treatment group”). Finally, since the proposition 2007/08:27
dated 25 October 2007 announces the actual reform where the cap is at SEK6.000 (not 4.500 as previously
announced), that is the treatment group consists now of properties above SEK800.000. The results for the
coefficient of interest (β7)are presented in the tables4-5 in the appendix (base month: Jan 2006). Observe a
significant jump in market value in the case of SEK6.000 cap - that is a much more significant price impact of
tax capitalization from January 2007 onwards.
For the implied discount rates and the degree of tax capitalization in the whole country,observe the
table below for ρ for the period around the Proposition 2006/07:100 dated 10th of April 2007 mentioned
that the property tax will be abolished (effectively from the taxation year 2008) and substituted with a “fee”
(“fastighetsavgift”):
Month (2007)
ρ=g+6000/β6
Feb 3,91%
Mar 3,71% Apr 4,06%
May 3,99%
Jun 5,92%
While for the period around Propostion 2007/08:27 dated 25 October 2007 which announced the
actual reform with the cap at SEK6.000:
Month (2007)
ρ=g+6000/β6
Aug 3,96%
Sep 3,74%
Oct 3,68%
Nov 4,45%
Dec 3,97%
Observe positive growth rates implied by the assumed full degree of tax capitalization and the
approximately 4% real discount rate implied from the market.
Now note the implied degree of tax capitalizationβ implied from different discount rates and
coefficients β6 and β7, with g=0,0278245:
15
β =β6(ρ − g)
6000
and
β =β7
0,0075 ρ−g+0,0075
ρ−g ρ−g+0.75∗0,0075
For implied degree of tax capitalization from an assumed discount rate and coefficient β6 , that is
β =β6(ρ−g)
6000 we have:
Month (2007)
ρ
3,50% 4% 4,50%
Aug 61% 104% 146%
Sep 75% 127% 179%
Oct 80% 135% 191%
Nov 43% 73% 103%
Dec 60% 102% 144%
While the implied degree of tax capitalization from an assumed discount rate and coefficient β7, that
is β =β7
0,0075 ρ−g+0,0075
ρ−g ρ−g+0.75∗0,0075
we have:
Month (2007)
ρ
3,50% 4% 4,50%
Aug 42% 74% 107%
Sep 44% 77% 110%
Oct 44% 77% 111%
Nov 20% 35% 51%
Dec 38% 67% 97%
Observe that the degree of tax capitalization is proportional to the increase in the difference of real
discount rate and the growth rate as well as the fact that the tax is capitalized less compared to Stockholm.
Several conclusions can be drawn from tables 3-5 and graphs 6-8 in the appendix. The cap of SEK6.000
resulted in a much more significant price impact regarding a tax capitalization, the point estimates become
more precise in the period around the Proposition 2006/07:100 dated 10th of April 2007and improve further
as one goes from a country level to the capital city level.
16
Robustness check
As a robustness check, the regional analysis is performed as follows: the provinces (kommuns) are
divided into two groups: one group is consistent of the kommuns where more than 90% of the properties
have a tax assessed value above SEK800.000, and the other – where more than 90% of the properties have a
tax assessed value below SEK800.000. The regression for the kommuns is:
MVi = β0 + β1TAVi + β2Gr1 + β3Gr3 + β4T+ βidouble interaction terms10i=5 + β10TAV ∙ T ∙ Gr1 + β11TAV ∙ T ∙ Gr3 + εi(4)
where T denotes quarterly time dummies for the whole period (2006-2008) and Gr dummy variable for the
group that the property sold belongs to (Gr1 denotes kommuns with the majority of properties below
SEK800.000, while Gr3 those above). From the regression results one infers that the tax gain is capitalized to
a larger degree in geographical areas where the majority of properties are theoretically affected by the
taxation reform. Consult the table below for further details (1Q 2006 is a base quarter) and observe that the
timing of the jump is around the Proposition 2006/07:100 dated 10th of April 2007,mentioning that the
property tax will be abolished (see table 6 in the Appendix):
It is noted that for the post-reform period the kommuns with the majority of properties above
SEK800.000 show significant jump regarding their market value. Descriptive graphs for the kommuns where
the majority of the properties (more than 90%) have their TAV above SEK800.000, and those where the
majority of the properties (more than 90%) have their TAV below SEK800.000 are provided below. There are
24.325 properties in the kommuns where the majority of the properties have TAV above SEK 800.000, and
54.871 properties in the ones where the majority of the properties have TAV below SEK 800.000:
17
Graph 9. Geographical areas (kommuns) where properties sold over a 2006-2008 period have in majority tax assessed value above SEK800.000
Graph 10. Geographical areas (kommuns) where properties sold over a 2006-2008 period have in majority tax assessed value below SEK800.000
Results and Conclusion The paper investigated the effect of the property taxation reform introduced in Sweden after April
2007 on the market price of the affected properties (one-family houses). Observe that the degree of tax
capitalization is proportional to the increase in the difference of real discount rate and the growth rate as
well as a much more profound degree of capitalization in the capital of Stockholm compared to the
provincial areas. The degree of tax capitalization is also very sensitive to the real discount rate, which under
148000015000001520000154000015600001580000160000016200001640000
0500
1000150020002500300035004000
Kommuns with the majority of the properties (more than 90%) having TAV above SEK 800.000
Number of properties
Median GroupHigh TAV
0100000200000300000400000500000600000700000800000
010002000300040005000600070008000
Kommuns with the majority of the properties (more than 90%) having TAV below SEK 800.000
Number of properties
Median GroupLow TAV
18
full degree of tax capitalization reaches 4%. An increase in real discount rate from 3,5% to 4,5% nearly
doubles the degree of tax capitalization.
As a concluding remark, note that the study was performed for the entire country as well as for the
capital city. Since the market price of a house includes the price of land, the tax capitalization channel may
be lying through the increase of the land prices. However, in the period 2005-2008 the land prices for
housing - as approximated by the price of agricultural land - were increasing at an almost constant rate8,
something which implies that that in the reform period of 2007-2008 the driving force behind the market
price increase in the housing market was a capitalized tax gain capitalized to a higher degree in the capital
city of Stockholm in comparison to the rest of the country.
8See Sorensen, 2013, ”The Swedish housing market: trends and risks”, agricultural land prices analysis, page 14.
Appendix
Table 2.Simple regression (1), Stockholm
Months 2006 2007 2008
Jan 618599 495564
(585236) (579485)
Feb 183864 1.340e+06** 1.137e+06**
(609963) (551382) (563641)
Mar 280833 1.357e+06** 1.236e+06**
(609963) (548694) (582802)
Apr 294992 1.425e+06*** 1.484e+06***
(589280) (551115) (557201)
May 846449 1.455e+06*** 1.159e+06**
(568516) (541575) (556442)
Jun 380064 1.247e+06** 532917
(597320) (543816) (572196)
Jul 124833 310833 697976
(774757) (682227) (860562)
Aug 347227 1.219e+06** 1.037e+06*
(571414) (558406) (601107)
Sep 809485 1.367e+06** 999452*
(556442) (542568) (569921)
Oct 642599 1.365e+06** 561262
(553398) (538754) (605298)
Nov 669495 931310* 705098
(564760) (540674) (607566)
Dec 831083 1.068e+06* 459333
(660715) (561570) (660715)
Constant 2.859e+06***
(522341)
N 3157
R-squared 0,043
Table 3.Estimation results for regression (2), Stockholm
Coefficient: β1 (T) Coefficient: β3 (TAV_x_dT) Coefficient: β2 (TAV)
Constant
Months 2006 2007 2008 2006 2007 2008
Jan -664,728* -247,322 0.558*** 0.376 1.731*** -190,470
(378,351) (488,459) (0.213) (0.285) (0.0658) (162,150)
Feb -9,587 -718,142** -1.099e+06*** 0.0285 0.627*** 0.889***
(303,410) (317,121) (421,802) (0.165) (0.162) (0.227)
Mar 734,618** -206,700 -1.062e+06** -0.384** 0.426*** 0.931***
(294,370) (310,497) (458,567) (0.151) (0.152) (0.256)
Apr -160,501 -301,685 -388,217 0.0788 0.560*** 0.606***
(302,717) (326,199) (310,723) (0.163) (0.172) (0.158)
May -189,174 -790,819** -391,204 0.162 0.805*** 0.596***
(244,567) (330,546) (289,647) (0.112) (0.168) (0.150)
Jun -13,078 -683,902** -657,360** 0.0177 0.751*** 0.737***
(328,701) (339,332) (319,163) (0.164) (0.178) (0.175)
Jul -562,141 214,066 1.351e+06*** 0.376 0.219 -0.529**
(633,834) (425,923) (368,207) (0.364) (0.244) (0.209)
Aug 49,102 -603,122** 505,692 0.0122 0.660*** 0.0290
(208,283) (281,990) (372,597) (0.102) (0.137) (0.207)
Sep -134,829 -175,738 -458,150 0.157 0.493*** 0.531***
(255,987) (272,839) (341,028) (0.123) (0.138) (0.170)
Oct -169,233 -790,467** -280,652 0.259* 0.776*** 0.325***
(273,376) (325,155) (212,289) (0.143) (0.167) (0.0989)
Nov -155,360 -700,672** -361,526 0.241 0.584*** 0.352***
(346,951) (272,589) (222,142) (0.185) (0.140) (0.107)
Dec 562,262 -761,052* -110,483 -0.134 0.576** 0.155
(436,447) (439,715) (348,052) (0.249) (0.232) (0.171)
N 3157
R-squared 0.831
Graph 6.Coefficient β3 point estimates and confidence intervals over a 2006-2008 period, Stockholm
Graph 7.Coefficient β7 point estimates and confidence intervals over a 2006-2008 period, cap SEK4.500
Graph 8.Coefficient β7 point estimates and confidence intervals over a 2006-2008 period, cap SEK6.000
-1.5
-1
-0.5
0
0.5
1
1.5
-1.5
-1
-0.5
0
0.5
1
1.5
-1.5
-1
-0.5
0
0.5
1
1.5
Table 4. Coefficient β7, the cap of SEK4.500
Table 5. Coefficient β7, the cap of SEK6.000
Coefficient: β7 (TAV_x_dTr_x_dT)
Coefficient: β7 (TAV_x_dTr_x_dT)
Months 2006 2007 2008
Months 2006 2007 2008
Jan
0.121 0.292
Jan
0.358 0.535**
(0.286) (0.292)
(0.225) (0.271)
Feb 0.296 0.0606 0.229
Feb 0.127 0.475*** 0.390**
(0.269) (0.234) (0.246)
(0.221) (0.183) (0.185)
Mar -0.134 0.335 -0.198
Mar -0.0400 0.564*** 0.0171
(0.313) (0.241) (0.320)
(0.196) (0.188) (0.329)
Apr -0.251 0.181 0.168
Apr 0.252 0.407** 0.485***
(0.268) (0.240) (0.229)
(0.194) (0.185) (0.174)
Maj -0.0623 0.188 0.104
Maj 0.205 0.467*** 0.277
(0.264) (0.227) (0.262)
(0.195) (0.173) (0.247)
Jun -0.216 -0.0479 -0.173
Jun 0.329* 0.195 0.0911
(0.250) (0.264) (0.286)
(0.197) (0.251) (0.281)
Jul 0.0564 -0.268 -0.604**
Jul 0.230 -0.154 -0.513*
(0.254) (0.310) (0.281)
(0.203) (0.329) (0.270)
Aug -0.0819 0.315 -0.0994
Aug 0.135 0.504*** 0.197
(0.253) (0.223) (0.229)
(0.186) (0.177) (0.180)
Sep -0.0398 0.179 0.0471
Sep 0.176 0.522*** 0.406**
(0.246) (0.232) (0.228)
(0.178) (0.186) (0.182)
Okt -0.170 0.172 -0.127
Okt 0.201 0.526*** 0.191
(0.230) (0.223) (0.232)
(0.175) (0.177) (0.185)
Nov 0.0890 0.0654 -0.00662
Nov 0.191 0.241 0.311*
(0.256) (0.227) (0.225)
(0.188) (0.174) (0.177)
Dec -0.238 0.0749 0.154
Dec 0.138 0.457** 0.408**
(0.258) (0.239) (0.245)
(0.191) (0.178) (0.199)
N
86830
N
86830
R-squared 0.833
R-squared 0.834
Table 6.Coefficients β10 and β11 for the period 2006-2008
Year-Quarter Coefficient:
β10(TAV_T_Gr1) Coefficient: β11
(TAV_T_Gr3)
2006-Q2 0.0636 0.134
(0.151) (0.140)
2006-Q3 -0.0682 -0.0114
(0.143) (0.133)
2006-Q4 -0.181 -0.115
(0.134) (0.124)
2007-Q1 -0.123 0.139
(0.130) (0.121)
2007-Q2 -0.0608 0.360***
(0.127) (0.118)
2007-Q3 -0.0896 0.313**
(0.131) (0.122)
2007-Q4 0.000346 0.254**
(0.127) (0.118)
2008-Q1 -0.642*** -0.184
(0.129) (0.120)
2008-Q2 0.186 0.691***
(0.126) (0.116)
2008-Q3 -0.409*** 0.00123
(0.130) (0.122)
2008-Q4 -0.0561 0.174
(0.129) (0.121)
N 86830
R-squared 0.835
Tables show the median Tax Assessed Values and number of properties sold by sales year and assessment years. Last rows and columns are, correspondingly:
median TAV of the properties sold during the whole period, by assessment year (2003-2012), median TAV of the properties sold for all assessment years, by
year (2005-2012):
Sales year Median TAV by : Assessment year
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Median
2005 663000 662000 913000 1055000 669000
2006 607000 591000 619000 1040000 1975000 689500 717000
2007 498000 475000 511000 853000 1031000 828000
2008 605000 483000 445000 855000 805000 1046000 1175000 832000
2009 657000 707000 424000 924000 870500 900000 1029000 636500 936000
2010 711000 358000 646500 874000 790000 820000 1176000 838000 401500 1132500
2011 707000 2130000 394000 727000 597000 847000 1177000 1186000 865500 1493500 1173000
2012 514000 454000 779000 530000 889000 1232000 1190500 1250000 1128000 1222000
Median 637000 652000 613000 893000 818000 891000 1167000 1173000 1232000 1133000
Sales year Number of transactions by : Assessment year
Total 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2005 15510 17407 383 444
33744
2006 10126 2644 14487 11501 8 2
38768
2007 716 127 1579 39274 89
41785
2008 79 22 113 18644 17240 72 111
36281
2009 15 2 13 12250 3622 12977 8956 28
37863
2010 7 3 6 951 173 2014 35542 650 28
39374
2011 3 1 5 121 46 175 20018 15007 482 90 35948
2012 4
1 35 15 60 13682 4192 14314 3498 35801
Total 26460 20206 16587 83220 21193 15300 78309 19877 14824 3588 299564
The observations in bold, totaling 86.830, are the ones used in the regression analysis. Note from the first table that Median TAV of the properties sold
during the whole period and assessed in 2006 is 46% higher compared to the Median TAV of the ones assessed in 2005.
Tables show the median Tax Assessed Values and number of properties sold by sales month and assessment years. Last rows and columns are, correspondingly: -Median TAV of the properties sold in a particular year (2006, 2007, 2008), by assessment year (2003-2009) -Median TAV of the properties sold for all assessment years, by month (Jan-Dec 2006, Jan-Dec 2007, Jan-Dec 2008)
Sales 2006
Median TAV by: Assessment year
Sales 2007
Median TAV by: Assessment year
Sales 2008
Median TAV by: Assessment year
2003 2004 2005 2006 2007 2008
2003 2004 2005 2006 2007
2003 2004 2005 2006 2007 2008 2009
Jan 588000 614000 925000 1097000
678000
Jan 472000 640000 530000 933000 718667 758500
Jan 455000
420000 821000 760000
807500
Feb 630000 599000 698000 1124500
714000
Feb 481000 705000 502500 962000 818000 866000
Feb 618000 448000 387500 913000 795000 1122000
878000
Mar 627500 586000 673000 1057000
722000
Mar 455500 428500 452000 920000 865000 860000
Mar 476500 294000 1178000 871000 789000 1070000
839000
Apr 672000 518000 725000 1131000
754500
Apr 479000 443000 477000 923500 1409500 894000
Apr 952000 293000 524500 896500 908000 1242000
899000
May 661000 596000 668000 1130000
740000
May 564000 341500 521000 859500 578000 838000
May 682000 796500 472000 906000 894000 1457500
900000
Jun 597000 600500 661000 1077000
687000
Jun 622000 642000 506500 850000 1004000 841000
Jun 564000 732500 387500 840000 821500 623000 1827000 827500
Jul 519000 529500 498000 836500 1950000
567000
Jul 519500 258000 489000 672000 1298000 662000
Jul 465500 207000 410500 673000 662000 1189000
664000
Aug 513500 395000 526000 948000
638000
Aug 406500 505500 455000 745000 1330000 742000
Aug 303000 1711000 687500 765000 713000 1041500
734000
Sep 643000 453000 586000 1099000 3751000 786000 774000
Sep 509000 1194000 642000 848000 929000 842000
Sep 1053000 1024000 343000 891500 835000 1389000
854000
Oct 603000 645000 633000 1086500 1351000 593000 806000
Oct 573500 715000 636500 909500 1267500 907000
Oct 386000 1447000 319000 872000 790500 904000 1679000 822000
Nov 622000 575500 595500 1026000 2200000
788000
Nov 760500 284000 637000 871000 1135500 869000
Nov 393500
1231000 933000 839500 900000 1012000 887000
Dec 586000 653000 556500 926500 1282000
718000
Dec 584000 933500 480000 829000 1178000 828500
Dec 445000 470000 558000 886000 829000 1161000 1168000 853000
607000 591000 619000 1040000 1975000 689500
498000 475000 511000 853000 1031000
605000 483000 445000 855000 805000 1046000 1175000
Sales 2006
Number of transactions by : Assessment year
Sales 2007
Number of transactions by : Assessment year
Sales 2008
Number of transactions by : Assessment year
2003 2004 2005 2006 2007 2008 Total
2003 2004 2005 2006 2007 Total
2003 2004 2005 2006 2007 2008 2009 Total
Jan 654 686 211 218
1769
Jan 185 15 451 1277 2 1930
Jan 5
9 1473 137
1624
Feb 879 579 717 454
2629
Feb 143 24 346 2401 3 2917
Feb 10 3 16 1942 721 1
2693
Mar 990 383 1168 573
3114
Mar 104 14 202 3036 3 3359
Mar 2 1 5 1647 1154 4
2813
Apr 834 219 1203 538
2794
Apr 56 8 119 2922 6 3111
Apr 9 3 14 1890 1675 2
3593
May 1261 219 1895 781
4156
May 59 12 116 4302 5 4494
May 15 4 15 2226 2147 2
4409
Jun 1299 180 2023 775
4277
Jun 42 11 100 4545 3 4701
Jun 9 2 16 1959 1984 2 2 3974
Jul 846 100 1233 590 1
2770
Jul 24 13 58 2887 5 2987
Jul 8 1 8 1219 1455 3
2694
Aug 764 84 1171 1063
3082
Aug 18 6 52 3158 11 3245
Aug 3 1 8 1248 1561 6
2827
Sep 856 78 1521 1871 1 1 4328
Sep 28 9 62 4335 16 4450
Sep 10 4 7 1620 2093 7
3741
Oct 775 61 1427 1882 2 1 4148
Oct 26 9 36 4528 12 4611
Oct 5 2 7 1398 1766 13 9 3200
Nov 664 38 1172 1810 2
3686
Nov 20 4 28 3492 12 3556
Nov 2
3 1153 1396 17 41 2612
Dec 304 17 746 946 2
2015
Dec 11 2 9 2391 11 2424
Dec 1 1 5 869 1151 15 59 2101
Total 10126 2644 14487 11501 8 2 38768
Total 716 127 1579 39274 89 80563
Total 79 22 113 18644 17240 72 111 36281
The downward trend in TAV values during the sales period Jan2006-Jan2007 can be observed both for Assessment Year 2005 (from SEK 925.000 to SEK
530.000) and Assessment Year 2006 (from SEK 1.097.000 to SEK 933.000). Note from the first table that Median TAV of the properties sold in year 2006 and
assessed in 2006 is 68% higher compared to the Median TAV of the ones assessed in 2005.
Tables show the median Tax Assessed Values and number of properties sold by sales year and assessment years for Stockholm sample. Last rows and
columns are, correspondingly: median TAV of the properties sold during the whole period, by assessment year (2003-2012) and median TAV of the properties
sold for all assessment years, by year (2005-2012)
Sales year Median TAV by : Assessment year
Median 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2005 1550000 1467000 1735000 2044000
1508000
2006 1619000 1447000 1512500 1776000
1661000
2007 1570000 1114500 1293000 1857000 2806000
1835500
2008 2321000 1097000 1444500 1783000 1821000 2034000 3461000
1806000
2009 1755000 1697000 1779000 2958000 5600500
2037000
2010 2022500 2447000 1653000 2718000 2736000
2657000
2011 1343000 1759000 2802500 2658000 4016000 4374000 2709000
2012 1395000
1574000 2837000 2809000 2721000 3948500 2839000
Median 1572000 1467000 1469000 1820000 1815000 1761000 2773000 2688000 2726000 3950000
Sales year Number of transactions by : Assessment year
Total 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2005 444 663 13 39 1159
2006 243 53 458 575
1329
2007 11 2 41 1363 5 1422
2008 3 3 6 606 610 1 4 1233
2009
347 83 472 341 2
1245
2010
4 2 53 1209 13
1281
2011
1 6 498 567 2 1 1075
2012
1 1 423 107 549 102 1183
Total 701 721 518 2935 701 533 2475 689 551 103 9927
The observations in bold, totaling 3.160, are the ones used in the regression analysis. Note from the first table that Median TAV of the properties sold
during the whole period and assessed in 2006 is 23,9% higher compared to the Median TAV of the ones assessed in 2005.
Tables show the median Tax Assessed Values and number of properties sold by sales month and assessment years for Stockholm sample. Last rows and
columns are, correspondingly: median TAV of the properties sold in a particular year (2006, 2007, 2008), by assessment year (2003-2009) and median TAV of
the properties sold for all assessment years, by month (Jan-Dec 2006, Jan-Dec 2007, Jan-Dec 2008)
Sales 2006
Median TAV by: Assessment year
Sales 2007
Median TAV by: Assessment year
Sales 2008
Median TAV by: Assessment year
2003 2004 2005 2006
2003 2004 2005 2006 2007
2003 2004 2005 2006 2007 2008 2009
Jan 1334000 1241500 1499000 1600000 1469000
Jan 1869000
1258000 1771000 1669000
Jan
1560000 1669000 1774000
1683000
Feb 1953000 1628000 1522500 1558000 1636500
Feb 2052000
1293000 1914000 1833000
Feb
1273500 1710000 1739000
1710000
Mar 1501000 1409000 1491000 2020000 1539500
Mar 1645000
1413000 1933000 1865500
Mar
2612500 1848000 1796500
1812000
Apr 1434000 1380000 1332000 1697000 1582000
Apr
1127000 1856500 1832000
Apr 2083000
1996000 2009500 2034000
2004000
May 1665500 1655000 1626500 1919000 1753000
May
1199500 1941000 1928500
May 2378000 1097000 1271000 1830000 1998000
1894500
Jun 1619000 2033000 1692000 1733000 1702500
Jun 1570000
1358000 1802000 1800000
Jun
1629500 1805500
1704500
Jul 1750500
1447500 1594000 1581500
Jul
1445000 1445000
Jul
1905000 1599500
1736000
Aug 1370500
1365000 1768000 1578000
Aug
1210000 1911000 1898500
Aug
1890000 1613000
1765500
Sep 1742000 1616000 1561000 1977000 1795000
Sep 1377000 1082000 1069000 1899500 2354000 1893000
Sep
1047000
1767000 1904000
1817000
Oct 1768000 2107000 1587500 1742500 1742500
Oct 1273000 1147000 1286000 1850000 2806000 1850000
Oct
2786000
1582000 1823500
3583000 1726500
Nov 1835000 1805000 1360500 1807000 1744500
Nov 1265500
1879500 1797000 3135000 1792000
Nov
1791500 1816000
3123500 1833000
Dec 1492500
1749000 2079000 1847000
Dec 1866000 1866000
Dec
1797500 1849000
1832000
1619000 1447000 1512500 1776000
1570000 1114500 1293000 1857000 2806000
2321000 1097000 1444500 1783000 1821000 2034000 3461000
Sales 2006
Number of transactions by : Assessment year
Sales 2007
Number of transactions by : Assessment year
Sales 2008
Number of transactions by : Assessment year
2003 2004 2005 2006 Total
2003 2004 2005 2006 2007 Total
2003 2004 2005 2006 2007 2008 2009 Total
Jan 8 12 11 12 43
Jan 3
9 47
59
Jan
1 52 4
57
Feb 35 16 26 33 110
Feb 1
9 105
115
Feb
2 73 32
107
Mar 35 13 43 33 124
Mar 2
6 116
124
Mar
2 49 34
85
Apr 23 3 55 44 125
Apr
1 106
107
Apr 2
87 76 1
166
May 32 4 82 65 183
May
4 160
164
May 1 1 1 89 104
196
Jun 29 1 75 39 144
Jun 1
5 143
149
Jun
60 56
116
Jul 6
8 10 24
Jul
17
17
Jul
7 16
23
Aug 18
23 61 102
Aug
2 84
86
Aug
37 43
80
Sep 19 1 52 89 161
Sep 1 1 2 152 1 157
Sep
1
63 81
145
Oct 19 1 42 98 160
Oct 1 1 1 188 3 194
Oct
1
35 68
2 106
Nov 15 2 30 71 118
Nov 2
2 168 1 173
Nov
34 49
2 85
Dec 4
11 20 35
Dec
77
77
Dec
20 47
67
Total 243 53 458 575 0
Total 11 2 41 1363 5 0
Total 3 3 6 606 610 1 4 1233
Note from the first table that Median TAV of the properties sold in year 2006 and assessed in 2006 is 17.4% higher compared to the Median TAV of the ones
assessed in 2005, while for the properties sold in year 2007 the corresponding increase is 43%.
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