Real Estate Prices Do Not Appear Responsive Toward Taxes

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

January 2008

Quite a few jurisdictions adopt various taxation measures to help guide (fire up or cool down) real estate prices, residential ones in particular. While reviewing some data on global real estate prices, your humble author has out of curiosity done some simple calculations with such price figures and their respective tax rates including those on (rental) income and capital gain.

The short and simple answer is that there appears to be no or little correlation between real estate prices and their respective tax regimes at least among the more than 100 markets being viewed. That is, markets with comparatively higher real estate prices do not necessarily have comparatively lower tax rates and vice versa. Here are some details:

A)     Data sources = mainly from Global Property Guide at http://www.globalpropertyguide.com/ and the markets include almost all continents and consist of both developed and developing economies-countries.  

B)     Real estate prices = are expressed in terms of US$ per square meter of residential floor area and correlations are done with (rental) income tax rates, capital gains tax rates, and (round trip i.e. buy and eventually sell) real estate transaction costs.  While prices do have some form of negative relation to taxes and costs as evidenced by the negative R values, their correlations are not considered significant. Refer to the table below:

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Correlations between:

 

R

R2

RE US$/m2

Income Tax

(0.15)

0.02

RE US$/m2

Cap Gain Tax

(0.00)

0.00

RE US$/m2

Transaction $

(0.05)

0.00

C)     Real estate rental income = are expressed in terms of US$ per month and correlations are done with  (rental) income tax rates, capital gains tax rates, and real estate transaction costs. The results are similar to those of prices and the correlations are not overly significant. Refer to the table below: 

Correlations between:

 

R

R2

Rent per Month ($)

Income Tax

(0.27)

0.07

Rent per Month ($)

Cap Gain Tax

(0.10)

0.01

Rent per Month ($)

Transaction $

0.05

0.00

D)     Real estate gross rental yields = the annual rental income are expressed as a percentage of the prices and these are correlated with the taxes and transactions costs as above. The results are similar to those of rental income and the correlations are not significant. Refer to the table below:

Correlations between:

 

R

R2

Income Tax

Gross RE Yield

0.20

0.04

Cap Gain Tax

Gross RE Yield

0.05

0.00

Transaction $

Gross RE Yield

(0.07)

0.01

E)     Real estate prices do correlate with rental income and to a lesser extent the rental yield = higher real estate prices (on a per floor area basis) generally do come by and large hand in hand with higher rental income (on a per unit per month basis) in the same direction, yet when rental income is substituted with gross rental yield (as a percentage of prices), the correlation is not only reduced but also goes in opposite direction. This implies while the more expensive real estate do command higher rental income, their prices are proportionately higher than the rental income they command thus compressing their rental yields. Refer to the table below: 

Correlations between:

 

R

R2

RE US$/m2

Rent per Month ($)

0.70

0.50

RE US$/m2

Gross RE Yield

(0.45)

0.20

F)     Between income tax, capital gain tax, and transaction costs = generally the two taxes correlate with one another in the same direction but are in opposite direction when they are each compared to transaction costs. Note however the correlations here are not very significant. Refer to the table below: 

Correlations between:

 

R

R2

Income Tax

Cap Gain Tax

0.33

0.11

Income Tax

Transaction $

(0.20)

0.04

Cap Gain Tax

Transaction $

(0.25)

0.06

Based on the foregoing rough analysis, while it cannot be said that administrative measures such as (rental) income tax, capital gain tax, and transaction costs are totally ineffective, they do not appear to have significant influence on (residential) real estate prices.

Admittedly, it could be argued that an individual market could see higher residential prices if not for its relatively heavy taxes, granted that the markets herein are at different stages of economic being, yet if these tax and transaction costs do exert a significant influence on prices, a certain even if vague pattern showing prices and taxes etc going in correlated opposing direction (i.e. high taxes etc do keep prices in check) should become observable. This is not seen here though further research is required to verify the rough observation and hypothesis herein.

Or perhaps some other measures could be more effective in terms of price guidance, say metaphorically the water tap.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.                                

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