Boom and bust in the Estonian real estate market and the role of land tax as a buffer

The Estonian economy in the past two decades has been highly leveraged and was characterised by increases in real estate prices. These increases in prices developed the pattern of a possible speculative bubble. In Estonia during this period, a land value tax was enforced; however, the tax implemented in 1993, was estimated only in 2001, thus diminishing its role as a buffer against speculative behaviour in the real estate market. The aim of this research is to assess whether the peak-to-trough phases in the Estonian real estate market characterised the pattern of a speculative bubble and to verify if a more rigorous implementation of the land tax would have lessened the speculative behaviour. We first give a perspective of the Estonian financial and economic environment: secondly, we empirically assess through econometric tests whether a bubble affected the Estonian real estate market; thirdly, we analyse through a panel model if a correct implementation of land tax would have buffered the speculative cycle in the real estate market. The results of our study demonstrate the presence of speculative bubble in the Tallinn house price and show that a more rigorous implementation of the Estonian land tax would have reduced the effects of the boom and bust dynamics in the real estate market. (C) 2012 Elsevier Ltd. All rights reserved.