Real-estate investors, house prices and rents: evidence from capital-gains tax changes

We study the dual role of real-estate investors – households who own multiple housing
units – in ownership and rental housing markets in Israel. Exploiting a series of capitalgains tax changes and rich administrative data, we first show that real-estate investors that
were subject to an unexpected temporary capital-gains tax exemption increased their sales
of housing units by 50%. Predominantly, the housing units sold by investors were
purchased by single homeowners and were previously occupied by renters. Next, we
exploit spatial variation in the share of the housing stock owned by investors across 360
local markets to examine how investors’ activity induced by the tax changes affected local
house prices and local rents. We present evidence that a 1 percentage point increase in
investors’ sales out of stock led house prices to decrease by 14% and rents of new leases
to increase by 4%. These effects are larger for smaller and older units, in which investors
own a larger share of the stock of housing units. The results suggest that policies that
encourage investors to sell can achieve their stated objective of reducing house prices, but
also run the risk of restricting the supply of rental housing, and thus adversely affecting
renters.