We highlight three effects that arise from the optimal choice of households. First, an increase in property tax rates leads to a mechanical increase in the assessed property taxes paid, but this effect is dampened by the reduction in house prices and lump-sum transfers of collected taxes. These combined forces lead to a housing substitution effect with an ambiguous impact on welfare. Second, the capitalization effect from house price reductions affects the financial constraints of working-age households in two ways. It makes initial housing more affordable and increases welfare. Households who chose to stay in location i, however, lose in borrowing capacity. Given the importance of down payment constraints at a young age, the capitalization effect can be expected to increase welfare. Third, an increase in property taxes reduces old-age wealth in two ways for households that do not relocate from the area with the increased property taxes. They pay high property taxes, receive lower housing wealth from the lower house prices, and therefore have lower total wealth absent relocation.
The key mechanism driving our results is the capitalization of higher property taxes into lower purchase prices, which relieves down payment constraints by financially constrained buyers
