Low property taxes make it harder for younger people to own

Property taxes are higher in Texas than in California. For younger people, homeownership rates are higher in Texas (red line) than in California (yellow line).

Property Taxes and Housing Allocation Under Financial Constraints. Joshua Coven, Sebastian Golder, Arpit Gupta, and Abdoulaye Ndiaye, June 2024. Summary by Arpit Gupta.

An interesting paper which describes how low property taxes result in higher home prices, making it harder for younger people to own instead of renting.

So what’s going on in California? The central force, we argue in the paper, is low property tax rates resulting from Proposition 13. The key insight is that property taxes function as a kind of a “forced mortgage.” Higher property taxes tend to lower the upfront purchase price of homes through capitalization. Essentially, future tax obligations get priced in to the current home value. Property taxes therefore result in a lower initial out of pocket equity investment, as well as higher ongoing costs in the form of annual property tax payments, which is equivalent to what mortgages typically do.

The lower prices attract young buyers, as they make down payment requirements more attainable for young, cash-constrained buyers. The higher user cost of owning housing pushes out aging empty nesters and encourages them to downsize. Overall, this tradeoff from higher property taxes is particularly beneficial for young families who have steady incomes to cover the ongoing payments but struggle to save the large lump sum needed for a traditional down payment in expensive housing markets.

We show that, across the United States, spatial variation in property tax rates is generally consistent with this story going on. Areas with higher property tax rates feature:

• More young homeowners

• Fewer empty bedrooms

• A higher percentage of children in the population

• Lower house prices and price-to-rent ratios

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