How Property Taxes Could Make Housing Affordable for Young Families
Overview: In the paper “Property Taxes and Housing Allocation Under Financial Constraints,” NYU Stern Professor Arpit Gupta, Professor Abdoulaye Ndiaye, PhD student Joshua Coven, and co-author Sebastian Golder (University of Hamburg) evaluate how different property taxes impact the housing choices for various age groups, and assess how changes to property tax policy could potentially make housing more affordable for young families.
Why study this now: Most bedrooms in owner-occupied homes are owned by people between 50 and 70 years old—empty nesters who often have more space than they need. Meanwhile, younger families with children frequently find themselves in crowded living situations, unable to afford homes with adequate space. Eventually, many households accumulate the down payment (or else are given them as a gift) to buy their own place. But they are often forced to choose between a large suburban house in a worse job market; or cramped living quarters in a better job market.
So, are policies such as California’s Proposition 13, intended to protect homeowners from rising property taxes, in fact hindering the affordability of houses for new buyers?
What the authors found: Areas with higher property tax rates have:
- More young homeowners
- Fewer empty bedrooms
- A higher percentage of children in the population
- Lower house prices and price-to-rent ratios
What does this change: Policies like California's Proposition 13, intended to protect homeowners from rising property taxes, may have had the unintended effect of making it harder for young families to enter the housing market. Homeownership for the young would be considerably more attainable under higher California property taxes.
Key insight: Property taxes play a more powerful role in shaping housing allocations than is conventionally realized. Property taxes act like a "forced mortgage" — upfront price is lower, capitalizing the taxes, alongside higher ongoing payments, just like a mortgage would do. This tradeoff helps financially constrained young families overcome down payment barriers.
This article was adapted from a post that originally appeared on Professor Gupta’s Substack, Arpitrage.