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Abstract:

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SERC/Urban and Spatial Programme Discussion Paper
Capitalization of Central Government Grants into Local House Prices: Panel Data Evidence from England
Christian A. L. Hilber, Teemu Lyytikäinen and Wouter Vermeulen September 2010
Paper No' SERCDP0057:
Full Paper (pdf)

JEL Classification: H2; H3; H7; H81; R21; R31


Tags: local public finance; house prices; supply constraints; central government grants

We explore the impact of central government grants on local house prices in England using a panel data set of local authorities (LAs) from 2001 to 2008. Electoral targeting of grants to LAs by the incumbent national government provides an exogenous source of variation in grants that we exploit to identify their causal effect on house prices. Our results indicate substantial or even full capitalization. We also find that house prices respond more strongly in locations in which new construction is constrained by physical barriers. Our results imply that (i) during our sample period grants were largely used in a way that is valued by the marginal homebuyer and (ii) increases in grants to a LA may mainly benefit the typically better off property owners (homeowners and absentee landlords) in that LA