The Economic Implications of House Price Capitalization

House price capitalization has long been thought to be a means of testing for efficiency in the local public sector. The extent of house price capitalization itself may have important economic implications. This working paper synthesizes 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/or geographical/physical 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.