Vancouver Tax on Empty Homes to Target Near-Zero Rental Supply
bloomberg.com
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I saw this a lot in the Malaysian market during the previous frothy years until 2014, many many vacant units, zero ability to negotiate rent - owners were going to get their asking price (rent or sale) or sit on an empty house/apartment. They were making ~10% a year so who can blame them. Then the Malaysian government slapped a retroactive (!) punitive capital gains tax on foreigners. In addition Selangor state (think most of the Kuala Lumpur suburban area) banned foreigners from buying landed, non-strata property.
Instead of lowering prices, this had the effect of driving the transactions to almost zero (very few forced sellers), very little property over RM1m (the minimum limit for foreigner purchase) sells these days. Lots of RE agents are losing their jobs/driving uber to make ends meet. The foreign (predominantly Chinese) owners have deep pockets and holding power. The coming years will be interesting if it continues though.
I look forward to reading the economic thesis papers in the future on whether this Canadian measure works and what the unintended 2nd/3rd order effects are. Its fun when govt's experiment like this, good grist for the mill for economic/psychological research.
You wrote "the simple solution is to build more housing", and point to Houston and Dallas as examples where there is no housing problem.
Yglesias proposes a more restricted solution, high-density zoning. This lets people build more housing in the same area, rather than going outwards as Houston and Dallas do.
gamblor956 mentioned a problem which is an issue in London and a few other places; foreign investment in (nearly unused) second homes has secondary negative effects. For example, with fewer actual residents there are fewer restaurants, stores, and other services for those people who live there, and who moved there because there were services.
The NYT at http://www.nytimes.com/2013/04/02/world/europe/a-slice-of-lo... gives a few real-world examples. It's made worse in London by the low tax rate for secondary homes, which is why Vancouver specifically wants higher tax rates for those homes.
Along the lines of Yglesias' description in Slate, suppose foreigners purchased American-made luxury cars from union factories in Detroit and parked them all in your neighborhood. As Yglesias says, "Great news, right?" It builds a lot of upstream production in the US, and "it should be providing lots of employment for working class men."
Except that now you don't have anywhere to park your own car, or for visitors to park, or even for the delivery truck to park.
How much livability would you give up for the benefit of the rest of the country? How much livability should Vancouver residents give up?
Foreign ownership of unused housing decreases density. I think it's possible to compensate by building even more density, with the expectation that 1/3rd of it won't be used. (Hopefully the market will be stable enough.) But my point is that it isn't as simple as looking towards Houston and Dallas.
Early indications are that it will succeed in that goal.
... So, yes, that's how land differs from a camper.
At one end of the spectrum, I pretty much own the clothes on my back and the items in my pockets. Sure, they're stolen occasionally in muggings (hasn't happened personally, knock on wood), but on the whole I spend no time in court or with police arguing over an ownership dispute about my underwear.
Any why is that? After all, my clothing is relatively nice and well looked-after, and the items in my pockets and on my person, including smartphone, wallet/cash, and watch are worth north of $1,000. If I were to leave the clothes and items in a bag on the sidewalk with nobody to look after them, the likelihood of their theft within the hour would skyrocket. So why am I not mugged every hour? Well, I think it boils down to the fact that I'm physically "there" wherever I go. Mugging me requires a certain level of brute force to make sure I don't fight back. Which is, relatively speaking, harder to come by than the effort required to pick up a bag of items when nobody is looking.
At the other end of the spectrum, let's say I own multiple properties in multiple locations. These real estate holdings can't be "stolen" in the traditional sense, but they can be occupied and used by people against my wishes. So how do I stop that? After all, I can only be physically present at any one property at a time. And even then, if it's a big property, I can only "guard" a portion of it. So how is it that I'm able to own all of these properties? It's the system of police and courts that makes this possible, and consequently I do spend a lot of time in court or with police arguing over contracts, tenant disputes, etc.
This "ownership" is only possible because of the system of laws and courts and police, paid for by the taxes of everyone. And so the voters that pay the taxes that allow these systems to work are naturally going to want a say in the matter. If I own a piece of land downtown, adjacent to a school and houses and office buildings, and decide to start pouring toxic waste onto it, the police and courts will not come to protect me while I'm doing so. They'll come to stop me. Even though I "own" the property.
And that's what's happening in Vancouver. These absentee property owners are not suddenly being deprived of their ownership. The change is actually happening right at the margin: the voters have decided they'd like to tweak the laws a bit so that the police and court resources they support aren't being spent to protect empty properties.
Now, is it right? Certainly I can see why the property owners are mad. They bought in expecting a certain set of laws to be enforced, and instead a new set is imposed. Which can also impact overall business and regulatory confidence. Delaware's popularity for incorporation is built upon its long history of changing its regulatory environment as little as possible, and trying to be as predictable as possible. But the situation in Vancouver is showing that there may be more latent unpredictability in regulatory and legal systems than is commonly thought.
You don't own the land so much as you own the right to use it under strict provisions.
http://www.thecanadianencyclopedia.com/en/article/property-l...
Harris County, Texas is a fair example of a "country" (1,777 sq miles, population 4.7 million) that has no zoning laws. They don't shoot each other any more than any other US city and it's a place where verbal contracts are still binding.
Rights do not derive from law. Owning slaves used to be legal, but that didn't give slaveholders the right to own humans.
>Good luck "sharing the land" peacefully with 8 billion people.
It's straightforward enough. Tax the value of the unimproved land at 100%. Use the proceeds to build roads, treat the sick, dole out welfare, pay pensions, etc. and all the other stuff our governments already do that they apparently don't have enough money for.
All that is required is a tweak to property law that wrests control over a natural resource.
This would eliminate hoarding and share this huge wealth which is not created, but is captured by the ultrawealthy.
Look up adverse possession:
If people want to invest in stuff, let them go for stocks, where their capital will at least be supposed to create value.
- there is such a thing as the commons;
- there is a cost to the government to protect your rights which is much higher for land than "virtual" assets and the cost to investors ought to reflect it.
Commons: I like that Singapore, for example, is taxing drivers around $90,000 per 10 years for the privilege of riding a car. The air is much cleaner and streets freer of traffic. Both of these were damaged by too many car owners. Similarly, the supply of land is limited whilst population can grow ad infinitum, creating ever upwards pressure on land prices.
Cost: in terms of individual rights, the army, police and justice defend your right to own that land free of damage, spurious lawsuits to drain your resources, land grabs by powerful men, and foreign invasion forces. This forms the basis of modern society and the implementation of your individual rights. The cost is proportional to land area but not as strongly correlated with company size in the equity case (you might have a few more problems but not proportionally to market capitalisation, and they involve court cases rather than policing, with most of the high costs - lawyers - born by private parties).
In theory, any land owners ought to be taxed, however, I make an exception for one's primary home (tax residence) considering that all citizen are naturally short housing (they need a place to live) and buying a home puts them in a housing neutral position and also has many positive effects on the commons (people are more invested in the future of their country if they own their home, less likely to move somewhere else, etc.).
Vancouver is a great example of citizen who have created ideal conditions for home ownership by participating in building a peaceful, prosperous economy which respects individual rights. Foreigners have accordingly swarmed to take advantage of the fact they were not charged for the benefits arising from ownership.
This has caused citizen - beyond the first generation of land owners - to be penalised for having built their own country up, as they end up unable to afford to live in it, burning up valuable income into paying high rents and house prices. A tax - which should offset what Canadians would pay elsewhere on productive activities, like income - is one of the best way to correct this imbalance, by charging the cost of enforcing individual rights to those who benefit from it.
To me the correct approach is to simply shift the tax burden higher onto investment properties, and expand the definition of "investment property" to include homes owned and occupied by able-bodied people who don't work for a living and never earned the kind of money that would be needed to afford such a home.
If you don't pay and never paid income tax, you don't need the tax exemptions that are given to homeowners.
That sort of means testing isn't required (and would be open to system-gaming / perverse incentive creation anyway). You just apply capital gains tax to all properties with the exception of one primary residence per person, and you could even cap the primary-residence exemption at the median value of a home in a particular area. So if you own property and rent it out rather than living there yourself, it gets taxed as an investment, period.
So that this cost isn't just passed on to renters, you should make the rental payments for your primary residence tax deductible, again perhaps capped at a median level so as not to perversely encourage higher rents.
I think you could construct a tax regime that was revenue neutral pretty easily this way.
Such an essay should show you that some level of regulation is required, or else the proposal will be easy to tear down.
Or, if I am wrong, it will become renowned for its content.
There are lots of essays about this and they claim it's realisable but the current power structures (such as state/government/central bankl) won't ever give away their power voluntarily.
I hear this argument often but in a free market the best (and not the perfectly informed) will perform best. Best here means the one making the best out of the given information which may still be very little.
Likewise, rationality helps but it's not at all a prerequisite. I wonder where people pick this up, I sincerely heard it often but I fail to see why one needs rational agents or perfect information.
I would appreciate an elaboration of your thoughts (that is, if you want to continue the discussion).
[Citation needed]
There are lots of investments that are either frivolous or actively harmful to others. You can't make this claim without a bit more reasoning.
In human slaves?
Many of the same moral justifications for prohibiting the ownership of humans applies to ownership of land and it's very profitable for similar reasons.
Of course, exclusive access rights are important for production and other reasons, so they usually would argue that landowners ought to be taxed in proportion to the land rights that they claim.
Places like Hong Kong have been able to forego income taxation in favor of collecting rent from land.
Conversely if you declare that you live in Canada whereas you're busy making a million a year in Dubai, that million ought to be taxed according to Canadian tax law as if you resided there.
There's plenty of rules already in existence to determine what is your primary tax residence as far as taxes are concerned, precisely to stop, say, a French resident from incorporating in Switzerland, getting paid into the structure, and not paying tax on his income (he can always try not to declare it, but then he becomes a criminal hoping that the rule of law is not thorough).
This allows foreign based property speculators to avoid capital gains on property.
Many people are claiming a property as their main residence whilst not staying in said property for more than a few weeks a year (main residence for these people is abroad).
The unpopular solution would be to charge capital gains on all property, irrespective of being your primary residence.
That would certainly cool a speculative market but I doubt such a measure would be supported by Canadians.
If your problem is tax evasion, the solution is enforcement. If it is a big problem, it will pay for itself when solved.
Obviously the long-term solution is to assume that people will always exploit any tax law as aggressively as they can, and that there's a basically-unlimited supply of people looking to park money in low-tax jurisdictions if they are allowed to do so. I don't think this was necessarily widely appreciated when many jurisdictions' tax laws were written.
http://www.theglobeandmail.com/news/politics/cra-launches-re...
There are cases where it'd make sense to live elsewhere though not legitimately, for example the rent-a-room scheme (can rent a room for up to 1k/month tax free) only applies in your PRR. So if you actually lived elsewhere that's a significant fraudulent tax saving if you're a one-property landlord.
San Francisco, and the Bay Area as a whole, is dealing with such issues as well. Vast restrictions on supply on a multi-decade timespan have created an anti-virtuous cycle of rising property values followed by more support for supply restrictions by incumbent property holders followed by further increases in property values and on and on.
Foreigners are an easy political target since they are usually unable to participate in the political process. "Other" bias also has strong rhetorical power unfortunately. But the real solution seems to lie somewhere in institutional reform around property rights protection(ie, use/build as of right).
If you have an empty house, you've already decided to pay a "tax" in the form of lost potential rent, not to mention actual property taxes and maintenance, and and an extra 2% isn't going to make huge difference.
Maybe 10% would be more like it.
I understand the problem but i dont see how raising taxes is the solution. Why are these houses vacant in the first place?
In Buenos aires this is a huge problem, in a census they found like 20%+ of units are vacant. The economy minister once hinted at implementing this tax and had to retract quickly.
The main reason property is vacant in Buenos Aires is because the state is failing to enforce contracts between tenants and owners, and owners do not trust tenants. A bad tenant can literally ruin you, because he can destroy the property, make himself impossible to evict, and a lawsuit can take up to 20 years to resolve, which is enough time for the perpetrator to liquidate his assets before the loses the trial.
And as you mention, if the reason behind these vacant units is rich people, then such a tax will prove a poor deterrer.
The vacant home issue is prevalent in nearly every large city in the world and it has a vast social cost. If you don't want to suppress it through tax (force them to live there, sell, or subsidize the locals by paying extortionate tax), another way would be facilitating squatting of empty property.
When you do that, you actually have charities that specialize in "opening up" unoccupied spaces and setting them up for homeless people to live there. I actually like the way we do it in France where if you stay there for a couple of days you are legally an inhabitant so it takes up to a years worth of legal proceedings to expel you.
And nobody likes to get coerced into anything. There should be no policy with the intent to punish anyone, whether rich or poor. And it is not the rich that cause the housing problem, which is real and global.
> The vacant home issue is prevalent in nearly every large city in the world and it has a vast social cost. If you don't want to suppress it through tax (force them to live there, sell, or subsidize the locals by paying extortionate tax), another way would be facilitating squatting of empty property.
It is vastly different to see an inefficiency as a cost over seeing as a lost of potential gains. A property owner that does not rent his property is not costing anyone anything: only he is the loser of the potential gains of renting the property. It is a benefit for a renter when he rents it out, not a cost when he doesnt. If we start seeing potential gains and costs that have to be subsided, you will notice a very uneven application of such criteria. Should people be spending time for leisure? maybe we should force them to do charity. Not doing charity is a vast social cost! 10% tax on wages if you dont do charity!
Any law that artificially lowers the value of property, for example by allowing squatting, or forcing taxes will lower both demand and supply. IF people buy less of those property, developers will build less, and often in the end you end up with less properties to begin with.
Not only that, but forcing things on people have the funny side-effects of getting push back. If you allow squatting, you will now see empty buildings getting boarded up (you can see this in Buenos Aires very often). That is costly to the property owner, costly to the neighborhood by showing an eye-sore.
>When you do that, you actually have charities that specialize in "opening up" unoccupied spaces and setting them up for homeless people to live there. I actually like the way we do it in France where if you stay there for a couple of days you are legally an inhabitant so it takes up to a years worth of legal proceedings to expel you.
Thats terrible, a huge deterrent to buy property, and so, of building property. People always have the greatest ideas when it comes to doing things with other people's resources.
What you're saying is you should be able to do whatever you want with your property.
I guess what I'm saying is that it is only your property because we who live here allow it to be, and uphold your ownership. If you're not using it responsibly - and leaving it empty is not using it responsibly - it's our right as a community to have you GTFO. And the softest way to do that is to tax you out.
The only reason the property is valuable in the first place (and rising) is because we who live here patronize shops, organize things in the area, and make it a good place to live. So you're piggybacking on our efforts while depriving a real person from living here. Again, the right thing to do seems to get together and get rid of the parasite...
Unknown. Until about 3 months ago, the municipal, provincial, and federal governments were all in lock-step agreement that there's no problem and everything is wonderful and there's no need to gather any kind of data about the housing crisis because that's just how things are in a World Class City™. As recently as May, our provincial finance minister was openly saying how great it was that "university students" were buying $32m mansions (that example was not a hypothetical). Right at the beginning of summer, some important election strategies went up in smoke very publicly. Between that and the Panama Papers leak showing that Vancouver real estate is a money laundering mecca, the housing crisis has become the #1 election issue. If you're trying to sneakily move money around using real estate, having a tenant calls a lot more attention to your activities than you'd probably want. Even if all your money is above board and you're just looking to hold onto a property to flip, a tenant can gum up the works. Evictions without cause take at least 2 months.
There has been some data collected by 3rd parties. The most reliable collected thus far shows ~12% of apartments in Vancouver are sitting completely vacant year-round. That was with a very narrow definition of "vacant" (staying in the apartment for 2 weeks in the summer counted as "occupied"). But that data was collected by the power company. They didn't care about why, just how many.
I am skeptical of that explanation, because housing has increased in rural areas as well, and in lesser cities. Moreover, increased demand could be accompanied by increased supply: cities could be building more. I know buenos aires is, and even though people complain about prices, demand for middle-class houses has been steady for almost 8 years and so has development.
For sure i am absolutely against laws and rules that try to patch a problem that is not understood, having the risk of making the problem worse.
I wonder what modern economists think of this.
At this point, it's a certainty that it's happening. The only question is to what extent. Overleveraged residents certainly isn't helping, but that alone simply cannot explain Vancouver real estate increasing in value more than the combined annual income of every resident in the city.
>housing has increased in rural areas as well, and in lesser cities.
That's usually chalked up to a combination of residents buying further out because they've been priced out of Vancouver, and former Vancouver owners who sold and are now looking for a "quieter" place to live. That's happened to at least one former landlord of mine, and my friend's parents are in the process of doing that right now. There's also an area to the south that is zoned for agricultural use, with mansion farmhouses and Ferraris parked out front.
>cities could be building more
In Vancouver, that's simply not possible to build more than we already are. People will often blame overregulation or zoning for not building more, but they completely forget about logistics. There isn't a single construction crew in the city that doesn't already have a huge backlog. Realistically, we're putting up towers as fast as they can be built and it's having zero measurable impact on housing affordability. And that's ignoring the already substantial problem of shoddy construction we have in this city.
>For sure i am absolutely against laws and rules that try to patch a problem that is not understood, having the risk of making the problem worse.
The general consensus among people I know is that it will have little to no effect. The government spent so long denying this problem even existed and openly refusing to even consider such a tax back in the spring, to implementing one overnight in the summer. Everyone here pretty much agrees that it's window dressing done to boost abysmal poll numbers in an election year.
>I wonder what modern economists think of this.
Economists out of UBC have been saying that the only explanation for such explosive, unrealistic growth in real estate is a flood of foreign money. Last I heard, they were calling this tax, at best, a good first step.
> Economists out of UBC have been saying that the only explanation for such explosive, unrealistic growth in real estate is a flood of foreign money. Last I heard, they were calling this tax, at best, a good first step.
Do you have any sources for this? This is a bit mindboggling: flood of foreign does not explain the global effect very well. Argentina doesnt have the same issue, but real estate prices also had its great increase. But also, flood of foreign money into a city like Vancouver could be helping a lot in its economic development: if a city is flooded with cash prices increase, but so does the economic revenue of many people in it: by putting a measure that limits money coming in, you could reduce prices but you would also reduce value, because the property is simply less desirable.
In any case, we still dont know why a rich person would buy a property and never rent it out if he doesnt plan in living in it and thats the supply problem its trying to get targeted. Why would the chinese tycoon face depreciation of his property and losing money? It even looks like a business opportunity, if it is so.
That's in the US. Canada wasn't hit anywhere near as bad by 2008, and Vancouver construction rebounded very quickly. With the way real estate has been skyrocketing since 2009, it was inevitable.
>This is a bit mindboggling: flood of foreign does not explain the global effect very well.
I'm not talking about the global effect, I'm talking about Vancouver, where prices have become so decoupled from local wages that you need to earn twice the median family household income just to afford the average home (I'm including condos in the definition of "home").
>flood of foreign money into a city like Vancouver could be helping a lot in its economic development
And it could also hinder its economic development if there's too much. The only question is whether or not there's too much. Given the completely out-of-whack salary to cost of living ratio, I'd say we hit the "too much" point a long time ago. I don't think there's anyone familiar with the area who says otherwise at this point, including the infamously, intentionally out-of-touch government.
>we still dont know why a rich person would buy a property and never rent it out if he doesnt plan in living in it
Right now, we can only speculate thanks to the government shoving their fingers in their ears and refusing to admit there's a problem. But there's a few key factors that help us make informed speculation.
First, we know from the Panama Papers that Vancouver real estate is being used to launder and hide money. You don't rent out your tax shelter or money washer to some rando off Craigslist.
Second, having a tenant delays sales by at least two months (that's how long an eviction without cause takes). That's a LIFETIME in Vancouver real estate.
Third, in the last few years, asset appreciation means you're gaining more money on paper just by holding onto the real estate than you could ever hope to collect in rent. Even if you pay a property management company to deal with everything, it's still a non-trivial amount of work for comparatively little gain.
Fourth, it sounds nuts, but in Chinese culture, a home that has been lived in sells for less money than one that has never been lived in. Something about feng shui, which is still such a big deal in China that it's made its way into Vancouver real estate. Hell, until the city council put a stop to it due to the logistics issues it causes emergency crews, buildings were going up that didn't have floors with the number 4 in them. 4 is associated with death in Chinese culture, and apartments with the number 4 don't sell as quickly.
The city implies that many aren't, just that people don't declare the income to evade taxes.
http://www.theglobeandmail.com/real-estate/vancouver/out-of-...
https://upload.wikimedia.org/wikipedia/commons/6/66/Croissan...
If you look at this plot you will see that the metro area has grown a lot, while the boundaries of the city haven't moved since 1860. There are various incentives in living in the city proper as opposed to one of the neighboring counties.
This is horizontal growth. Vertical growth has been forbidden for a while now as there are very tight laws about how tall new buildings can be and whether old buildings can be torn down.
Without relaxing at least one of these two constraints regulations on rent are going to do very little.
A city-sponsored study in 2014 used electricity-usage data to determine that about 5 percent of homes in Vancouver were uninhabited over 12-month periods."
If that becomes the criterion, we will have empty homes running power for no reason! Worst of both worlds.
And you can argue all you like from libertarian points of view about regulatory capture but Canada is pretty comfortable with consumer protection laws. I think the results are fairly easy to anticipate.
It's not just a tax on empty homes - it's an attempt to tax under-reporting AirBNB hosts.
(Source: I'm just a guy wearing a tin foil hat)
It's sad that modern laws have to optimize for crap like this.
> It's not just a tax on empty homes - it's an attempt to tax under-reporting AirBNB hosts.
Which would also unfairly impact accurately reporting AirBnB hosts.
Note that I don't actually think the tax itself is a bad idea. It's a clever way to get owners to live local and is a pretty smart as far as "Out of towner's tax"'s go.
But locally it's a problem. There are lots of non-Canadians living there and the purchase tax is a real problem for them, it adds to the cost of really overinflated homes.
My plan is to start a business call "Sim-Live", I'll make your house looked lived in for a small fee every month. Lights on, people in an out, small party every other month, trash out to be picked up, Amazon boxes, mail, etc.
But yeah, what are the criteria for deciding whether it's empty or not. People will get creative quickly.
And because of your post I've changed my company name to "Sim-Secure" We keep your house from being broken into and vandalized by making it look lived in. Thanks for suggesting the pivot! :-)
Nine students 'own' a combined $57M in vancouver property: http://www.news1130.com/2016/09/14/nine-students-own-57m-wor...
Another point that is not often raised is the crazy increases are mainly in detached houses. Condos and attached properties have increased a lot, but not nearly as frothy as detached houses. Suggests the type of purchase that is driving the increases. http://www.news1130.com/2016/02/02/vancouver-house-price-new...
Is there something that is tilting the balance the other way? I.e. Making renting out for some amount not worth it?
Maybe they are, and it's just all being conducted on a cash basis. Or if a Chinese owner is renting to another Chinese expat, they could be handling the rent payments in China (advantageous as it avoids moving the money outside China, which I am led to believe can be difficult and is one reason for the complex real-estate-based 'money parking' schemes in the first place).
The tax on "vacant" properties should probably be set equivalent to the income tax that one would pay on the average rent that you could extract from the property if it were fully rented. That would discourage actual vacancy and eliminate much of the incentive to have under-the-table renters.
One reasoning I heard is because our winters are so brutal, it would be inhumane to kick people out in the cold.
Besides, not having tenants helps increase the upward pressure on property prices. Like trying to corner the silver market.
If we shifted taxes away from production and onto land use in general, regardless of whether it is vacant or not, we would no longer see this underutilization of land, and also end the perverse incentives of taxes on productive activity.
Vancouver isn't San Francisco.
The vast majority is zoned for single family homes, and any kind of densification is resisted vigorously by existing property owners. E.g. http://www.cbc.ca/news/canada/british-columbia/commercial-dr...
There's no question Vancouver is building, but it is not building enough of the right kind of housing (i.e. rental, non-luxury, and > 1 bedroom units).
Since 2013 councils can levy an “empty homes premium” of an additional 50% council tax [1]. No idea how many actually do.
The rate of unoccupied dwellings in London is 1.7% [2]
1. https://www.theguardian.com/society/2016/feb/21/tens-thousan...
2. http://www.emptyhomes.com/wp-content/uploads/2011/05/Empty-H...
Some economists at the local university proposed instead a property surtax that would be waived if there was enough locally generated income. That seems to me to be a more elegant solution.
https://www.biv.com/article/2016/1/local-economists-have-sol...
If it doesn't drive forced sales I can't see the prices falling significantly.
If you have a mortgage, that is a contract. As long as you are paying the mortgage off as agreed upon, the banks can't take your house.
These "lonely homes" are shown only by first 3 characters of the postal code (aka FSA) to preserve their anonymity.
The goal is to identify how much of an issue this is and show how it affects neighbourhoods.