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The estimation of property taxation capitalisation on house

VIEWS: 14 PAGES: 16

									2009 Housing Researchers Conference




    Property tax capitalization
         effect in Seoul
                                  5 Aug 2009

                                                                          Hyung-Min Kim
                                                                              Ph.D. student
                                                                The University of Melbourne

                                                                       Youn-Kyoung Hur
                                       Construction and Economy Research Institute of Korea

                                                                      Kyoung-Seok Jang
                                      National Assembly Research Service, Republic of Korea
                                                                                              1
                Introduction
• Background
   Property tax as a tool of housing price control
   Introduction of Gross Real Estate Tax in 2006


• The aim of research
   Capitalisation effect on housing price
   Change of housing price distribution



                                                     2
   Korean Property taxation(1)
• Many kinds of property taxes
    Based on the same house
    Different levels of governments
     • “Property tax”, and its surtax “Local education tax”
     • “City planning tax”
     • “Facility tax”
     • “GRET” and its surtax “Special tax for rural development”

                                                   GRET
       Central government            Special tax for rural development

     Metropolitan government                   City planning tax
         (e.g. Seoul, Busan)          Facility tax, Local education tax

        Local government                        Property tax
      (si, gun, gu, e.g. Gangnam)                                         3
   Korean Property taxation(2)
• Progressiveness
    Tax rates according to the house price
    Reinforcement due to the GRET
                           House price     Tax rate
      Tax title                                                    Tax base
                           (million won)     (%)
                            Below 40        0.15
    Property tax             40 ~ 100        0.3            Assessed house price
                            Over 100         0.5
                            Below 300         1             Assessed house price
                           300 ~ 1,400       1.5          subtracted 600 million won
      GRET
                          1,400~10,000        2
                                 10,000       3
             City planning tax              0.15         The same to the property tax
           Local education tax               20           The amount of property tax
    Special tax for rural development        20       The amount of gross real estate tax   4
   Korean Property taxation(3)
• Limited local government
    Fixed tax rates by law enacted
    Discrepancy between burdens and benefit
     • Hard to say “benefit tax”
     • Weak linkage between property tax and public service



c.f. Property tax cap policy
    Ban from rapid increase of property tax payment


                                                              5
          Study area: Seoul
• Composed of 25 districts(gu), 3 civic centers




                                 Population: 10 million
                                         Area: 605        6
                           Data
• Effects on housing price
    Apartment: major housing type
     • 54.2 % of total houses (in 2005)
     • 76.5% of the newly constructed houses (in 2006)

    Appraisal price
     • Open to the public from 2006 to 2008
     • On a yearly basis by the same institution
     • Sample size: 32,101

• Effects on the distribution of housing values
    Air distance from civic centers (ArcGIS)
                                                         7
         Descriptive statistics
• Housing price distribution (in 2007)




                                         8
                         Framework

             Housing price                  Tax base


             Estimation of
                                            Characteristics of property tax
       tax payments & tax rates

           Relation between
                                            Modified repeat sales model
    tax payments and housing price

            Relation between
                                            Correlation analysis
tax rates and distance from civic centers


              Implications                  Primary purposes of property tax
                                                                               9
 Property tax amounts and rates
                                   2006                 2007                         2008
                                      Standard              Standard                 Standard     Portion
                         Average      Deviation   Average   Deviation   Average      Deviation     (%)
    Property tax             268            258       316        371        373             510    46.15
Gross Real Estate Tax         38            386        91        600        100             680    12.43
  City planning tax          167            123       209        167        240             172    29.71
 Local education tax          54             52        63          74        75             102     9.23
 Special tax for rural
      development              8             77        18        120         20             136     2.49
        Total                534            896       698       1,332       808          1,599       100
                                                                                  Unit is thousand won




                                                                                                      10
               Methodology
• Modified Repeat Sales Model
   Hedonic price function

   With property tax

   Differentiation

   Capitalization rate

                            Where, P is housing price
                                   X is attributes of houses
                                   T is property tax payment
                                    r is discount rate      11
    Result: modified repeat sales(1)
• Descriptive statistics of variables
          Variables              Mean          SD         Minimum    Maximum
        Tax payment
   (independent variable)        163.7        502         -1 785.7   13 819.2

       Housing price
    (dependent variable)        11,904       25,801       -376,000   239,000

  Unit is thousand won


• Regression result
                           Coefficient   Standard error   t-value    p-value
      Intercept             17537.0          475.5         36.88     <.0001
                             -21.9            0.2         -94.70     <.0001
  Referring to district dummy variables in the paper
                                                                                12
   Result: modified repeat sales(2)
• Intercept
    Reflection of market trend
    Housing price increase was 17,537
    controlling taxation effect and districts
• Capitalization                         Capitalization
                                             rate
       is -21.9                               1.2
                                                      Over
                                              1
    Capitalization rate is up to r and        0.9
                                                      Partial

    Almost fully
                                                                             r
    or slightly over capitalized                               4.1       5.5
                                                                       (in 2007)
                                                         (in 2006)
                                                                   4.57
                                                                        13
       Result: correlation analysis(1)
• Tax rates & distance from civic centers
    Closeness to civic centers means higher housing price
     • Trade off between housing price and transportation costs)
    Due to the progressiveness
     • Close area: higher price, higher tax rates
     Vs. Farther area: lower price, lower tax rates




                                                                   14
       Result: correlation analysis(2)
• Negative correlation
    Tax rates and distance from civic centers
                                    Distance from
                       City hall         Yeoido       Gangnam
                        -0.19            -0.117        -0.428
     Actual tax rate
                       (<.0001)       (<.0001)        (<.0001)


   Close area is applied to higher tax rates
     •Housing price decrease more in closer houses,
       than in farther area
     •Home values distribution changes
     •Especially, near Gangnam

                                                                 15
                   Conclusion
• Capitalization effect
    Fiscal differences were capitalized in home values
    Almost fully or slightly over capitalization effect
    Market trend outweighed capitalization effect
• Home value distribution
    Fringe area would be increase more
    Could stimulate outer area development
• Primary purpose of property tax
    Provide public goods vs. housing price control
    Strong relationship between tax rates and public goods
                                                        16

								
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