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SERC/Urban and Spatial Programme Discussion Paper
The Economics Implications of House Price Capitalization: A Synthesis
Christian A. L. Hilber
October 2011
Paper No' SERCDP0091:
Full Paper (pdf)

JEL Classification: D71; R21; R31

Tags: house price capitalization; homeownership; local public goods; club goods; land use regulation; land and housing supply; incentives to invest; redistribution

In this article I argue that the extent to which fiscal variables are capitalized into house prices has important economic implications. I synthesize an emerging literature that explores the conditions under which public and private investments and intergovernmental transfers are capitalized into local house prices and the broader implications of such capitalization. The main insights are: (i) House price capitalization is more pronounced in locations with strict regulatory and geographical supply constraints; (ii) capitalization can – under certain conditions – induce the provision of durable local public goods and club goods; and (iii) capitalization effects – which are habitually ignored by policy makers – have important adverse consequences for a wide range of policies such as intergovernmental aid or the mortgage interest deduction.