74th International Atlantic Economic Conference

October 04 - 07, 2012 | Montréal, Canada

Are federal-provincial equalization transfers capitalized into metro house prices?

Sunday, October 7, 2012: 11:15 AM
Melville McMillan, PhD , Economics, University of Alberta, Edmonton, AB, Canada
Are Federal-Provincial Equalization Transfers (and Provincial Natural Resource Revenues) Capitalized into Metropolitan House Prices?

by

Melville L. McMillan and Deniz Dogan

Contact: melville.mcmillan@ualberta.ca

Department of Economics

University of Alberta

Abstract

Are federal-provincial equalization transfers capitalized into property values? In Canada, the federal government’s equalization payments are significant sources of revenues, representing up to 25 percent of revenues, to recipient provinces. It has been suggested that these grants are capitalized into property values and offset, at least partially, the benefits of the transfers. Some scholars in the United States have attributed the lack of federal-state equalization there to the belief that capitalization is substantial and effectively offsets fiscal advantages and disadvantages across states. Inter-metropolitan analyses in the United States have explored the impacts of environmental amenities and quality of life variables on property values or wages and some of those studies include local and state fiscal factors. In Canada, such studies are rare. Instead, research here has focused on (e.g., interprovincial) migration and particularly the fiscal inducements to migration. We believe our study is unique in analyzing the impacts of federal-provincial equalizing transfers on property values.

We examine house prices in 21 Canadian metropolitan areas from 1974 to 2007 following established models and methodology. We present empirical estimates for both short-run and long-run specifications. The models perform well.

Our results offer no evidence supporting the capitalization of equalization transfers. This outcome is consistent with our expectations (although the result may, initially. seem at odds with certain analyses using U.S. data). There is, however, evidence that provincial government natural resource revenues are capitalized into house prices. This result raises the question – if government resource revenues are capitalized, why not equalization payments of similar magnitude? That question leads us to examine further the capitalization of resource revenues and offer additional evidence and explanation of the impacts of provincial government resource revenues on house prices.