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Articles:
Residential Stability or
Rational Bubble: Authors: Mark Hoven Stohs and Yun W. Park Start Page: 26 Abstract:
California?s Proposition 13, which
limits the growth of property tax to 2 percent per year, provides homeowners
an incentive to remain in their housing units and thus contributes to
residential stability. Yet, with fast home price appreciation, new home
buyers may purchase a home and then sell it again within a short period of
time. Even though they incur transaction costs, they can gain by the
appreciation. Under Proposition 13, faced with a disproportionately large
property tax relative to those homeowners who purchased their homes a long
time ago at a much lower price, the new homebuyers have an additional
incentive to trade homes fast in an up market to avoid paying a high
property tax. We call this short term residential trading ?Proposition 13
risk arbitrage? and predict that Proposition 13 induces additional
short-term residential trading, which adds to the underlying residential
market speculation. Cross-sectional variations of the residential holding
periods over the 1993 to 2001 period in the five counties of Southern
California are generally consistent with the predictions based on
Proposition 13 induced trading: Households which face a higher property tax
per square foot and those that experience larger capital gains show a
shorter holding period. We also explain the time variation of the aggregate
residential holding period using the Proposition 13 risk arbitrage argument. |
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