Economists at UT Dallas have released a study showing that property taxes could be the reason for the early 2000s housing bubble that led to the recession.
Recently published in Public Finance Review, the study found that during the housing bubble property taxes were inconsistent with the increasing values of homes and they ended up plummeting because they could not keep up with the changing market. The result was property taxes adding up to a lesser portion of the total cost of the home.
According to Seth Giertz, author of the study, this fueled demand.
“If you’re looking to buy a house and there’s a lower tax rate associated with it, you’re willing to pay more for the house,” he said. “On the downside, when house prices are falling, the effective tax rate is going up. Especially during the bust, property tax practices made things worse, as many communities either substantially cut public services and/or substantially raised property tax rates at a time when many in the community could least afford it. Many times, increases in property tax rates came about not from legislated tax increases, but from keeping assessed property values at well above properties’ true market values.”