Bay Area wages soaring but still can’t keep up with housing prices

We're fine with that, I think, because assigning the rights to the landowner (and not taxing away essentially all of the value of those rights) helps ensure that the well gets developed. As a city grows in population because of the economic opportunities it presents, no corresponding incentive is necessary. (At least in the case of Silicon Valley, people are moving here despite a massive disincentive in the form of property values.)

> If I understand the LVT, applied to this scenario, instead the residents are forced out because they cannot pay the LVT.

Well, again, my proposal for modifying Prop. 13 could also apply to the LVT: to limit the payments due while someone is living in the house, and allow the balance of the tax owed to be collected when it is sold. That's a modification to the LVT as it is usually considered, but would allow us to make it easier for homeowners to ride out periods of rapid price appreciation. (The poor dears. [0])

I think part of the point of taxing only land value, as the LVT does, rather than taxing improvements as well, is to encourage density. It's true that the modification I propose works somewhat against that; but I'm also inclined to agree with those here saying that a complete repeal of Prop. 13 is not in the cards.

[0] I couldn't resist this crack once I wrote the previous sentence. I think it's often forgotten by Prop. 13 proponents that, prior to Prop. 13, the people with big property tax increases also had big paper gains that could, in principle, cover those taxes. What Prop. 13 really is is a massive wealth transfer from newcomers to people already here. That's understandably popular with existing residents.

Not in California. The maximum annual increase in assessed property value is 2%, and property tax is limited to 1% of assessed value. This only changes when the home is sold.

It's pretty unlikely for anyone to be forced out of their homes because of property tax increases.

Not as much as you think.

This might be politically easier, too, than what I'm proposing. Prop. 13 was sold, in part, with a promise that landlords would pass their savings along to renters. That was a stupid promise to make and was never going to happen; rents are set by the market, period.

Many homeowners are already unable to sell because they will have to buy another home, which will come with dramatically increased property taxes if they have owned their current home for as little as five years. This is because the base assessment under Prop 13 is refreshed by a sale, and house prices have doubled in the past five years in the Bay Area. (In the past 30-40 years, home values have increased almost 10X.) They can only avoid this if they move out of the area to somewhere cheaper, or choose to become renters.

A tax lien on the value of the property on top of that would make things even worse. We should be encouraging more liquidity in the market, not less.

If the property value merely takes a big jump in the first year and doesn't change thereafter, the annual payment will eventually catch up to it (a 2% annual increase is still exponential growth!).

If you want to add a clause that says that the collected tax will never exceed the difference between the sale price and the original purchase price, I'm okay with that. But I'll bet it will practically never be needed.

No. Show me a scenario in which that happens. Remember that applying the Prop. 13 formula to the tax payments allows them to grow at 2% annually. No lien is created in the first place unless the property appreciates faster than that.

In 2008, the banking system imploded. Owing to a number of things, but primarily securitized lending leading to too many bad loans, losses in the banking system exceeded the amount that could be absorbed from loss provisions and profits. (Which as point of reference, isn't that high to begin with, it's no more than about ~0.75% of total loan capital/year).

The US (and other countries) did two things - they bailed out the banking system's asset losses, and they lowered interest rates.

Had no intervention at all occurred, there would have been a great depression style crash. That would have led to substantially lower house prices (due to the destruction of money/credit) - but it would also have destroyed anything else in the economy that depends on credit.

Had just the asset side bailout occurred (this is essentially Quantitative Easing), and interest rates been held high - housing prices would still have dropped. Lower interest rates translate directly to being able to afford larger loans, larger loans mean non-linear (leveraged) higher house prices in any market where housing is in any kind of scarcity/high demand.

Now it could be argued that it was necessary to do both to stop the banking system failure from destroying the economy - but in that case, and with house owners clearly benefiting preferentially, why wasn't some form of compensation advocated for all the non-house owners in the economy?

If land tax were, say, 10% of land value, then buying a house would be at least an order of magnitude less capital intensive, and the homeowners capital risk would therefore be much less significant.

You're questioning whether we should have property taxes at all. As long as we do, the principle that property owners share their gains with society is established. And certainly, if property values fall, taxes should (and I believe generally do) as well. So to that extent, it already happens.

Governments need a certain amount of money to function. The question is, what is the best structure for the taxation system. Should we tax property? Income? Consumption?

There seems to be general agreement among economists that a land value tax is the least inefficient form of tax. Read Henry George if you want to know why.

That said, I admit I'm not optimistic either, but the way to do it is to point out how ordinary people in the Valley have been or are being forced out of their homes by rising rents and the generally rising cost of living -- as property values rise, everything becomes more expensive. There's a hardship story there at least as compelling as that of the fixed-income seniors that Prop. 13 was designed to help (at least, that's how it was sold). Bay Area teachers, plumbers, food service workers, etc. etc. etc. surely have as much interest in not being forced to leave as anyone else -- and what's more, the local economy needs them! We can't run a regional economy with only software developers!

It's true that Prop. 13 is not the sole cause of the problem. Kim-Mai Cutler [link in my first post] does a great job of analyzing the whole situation (though I guess the Google bus thing has blown over since she wrote it in 2014). But it is one cause, and it may have to be addressed before the problem can be solved.

I know that getting people to vote to increase their taxes is exceedingly difficult. But excessive property values behave just like a tax: you can't get out of paying if you live here, and the money is sucked out of the local economy -- it doesn't even go toward local services and infrastructure. The argument is that we'll all ultimately be better off if we build enough housing for everyone who wants to live here. The change I propose is one way to encourage that to happen.

Secondly, rhetoric about "more" government and "less" government tends to leave me cold. (The solution to buggy software is not "less software" any more than it is "more software".) What we need is well-designed government. That means, among other things, that when we find that one of our systems has unintended and undesirable consequences, we fix it.

And thirdly, I don't know how this is a "government-caused problem". Prop. 13 passed by referendum.

The rationale is closer to this: the government caused this problem, and the government can (and should) fix it.

$300,000 a year is $190,000 post-tax.

Assuming 20% down, a $1.7M home would cost somewhere in the range of $8,000 a month after factoring in the mortgage income tax deduction.

That leaves $94,000 a year disposable, which is a lot anywhere. This family can readily get a full-time nanny for the early children years, ensuring no parent needs to take time off.

Usually when people mention foreigners in real estate, they are talking about nonresident investors (often Chinese citizens). Calling out mere ethnicity of homebuyers is weird.

That is true and one of my neighbors was a realtor for 20 years and has a number of friends who advertise in foreign countries that they can find you an investment property in California. Typically though, those buyers seem to be "status invested" rather than simply buying a house. So they look for places in San Francisco, or Palo Alto, or Saratoga (places where there is some status associated with owning a home there) rather than say Sunnyvale or Santa Clara.

That said, my neighbor came to the US on an H1B with his wife and daughter, is working for a local tech company, and his parents gave him the money for a 20% down payment on his house. That saved him the more typical path it seems of getting a starter house, building a bit of equity and then trading up to a larger house. I expect that being foreign nationals they don't have the gift tax burden that US parents do.

On the one hand that is foreign capital fueling higher house prices but at the same time my wife and I got a loan from her parents to help buy our original house, so I don't consider it out of the ordinary if the parents can help out.

And how many of them were engineers moving over for jobs? It's not just Californians relocating from nearby communities, sure -- I moved from Canada (via a few years in New York), for example. But it's unlikely to be some foreign absentee landlord.

In the DC area this results in a weird trend. There are almost no 3 bedrooms in Georgetown below a million. That'll buy you about 1,200 square feet. $2 million will buy you an actual urban mansion with triple the square footage and wood paneled walls. The price is entirely driven by what ~$300k HHI couples can "afford" maxing out their mortgage eligibility. Once you get above that, demand drops precipitously.

If you assume you shouldn't spend more than 1/3 of your gross income on a house, that would mean the homeowners should be making $325K/year (and already have $500K saved they can plow into a house).

Wow.

There are so many things that make this an apples-to-oranges comparison, the above list is not comprehensive.

Yeah, to the point that you should think of a different solution. Prop 13 is the 'electric rail' of California politics.

I'm aware you can commute eg an hour plus each way from easy bay and find homes for $700k (a bargain!), but something has gone wildly wrong when supposedly well-paid employees can't afford an entry level home in the city they work in.

The difference at play is not culture. The difference is housing market restrictions, median wages and company + worker density. Every city has cultural, food and geographic advantages. To word it that the Bay Area is nearly strictly superior is to frankly confuse the issue entirely.

It's still summer.

1) Way below market rates: It is below market rates, but not that far below. This house is in west San Jose, and according to zillow and CL, they might be able to get 5k for it. Maybe. That's still far below the 7k mortage + property taxes, not to mention the investment income you could be making off the 300k you put up for a down payment.

2) Renter protection laws: The renter was introduced to them personally, and they were vouched for by a mutual friend. It is extraordinarily difficult to evict people in the bay area, even for non-payment of rent. The rentees are not professional property managers, they don't know the ins and outs of rental law, so they're willing to take a haircut. Having bad tenants in your property will easily wipe out 2k a month for 2 years.

Edit: Of course they could hire a professional property manager, who would know all the laws and deal with bad tenants, but that would come right out of the bottom line. I don't know how much property managers charge, but then the trick is not to find a good tenant, but to find a good property manager. It would be like a non-technical cofounder looking to find a good engineer. Where would you even start?

You didn't "give" 40k to your landlord. You paid him for the use of his property, which presumably gave you shelter, kept you warm, gave you a place to park your car and keep your stuff, and he would fix anything that went wrong.

That, to me, would like be me kicking myself for "giving" a hotel a couple hundred dollars for a room for a couple of days.

A house provides you with shelter and warmth, and presumably provides these things to your family. You're paying money to take advantage of these things. Why is renting so much different from buying?

In other words, when renting, the upper bounds for housing costs is $9600/yr. While when owning, the lower bounds for housing costs is mortgage * 12, and you'll maybe get a small % of that back when you sell.

My point is that no Apple, et. al, you can't keep extracting heat from the system and violate the second law of thermodynamics, at some point, people will evaluate the costs and people will be more and more reluctant to relocate to SV just to have a shot.

Yes, they hire in the Bay because there is talent in the Bay. But talent is in the Bay because they hire there.

If they set themselves to it, I'd imagine they could convince a lot of people to work in other locations. "If you move to <city> with half the CoL, we'll pay you 90% of your current salary"

The Fed didn't "spend" $6TT; they exchanged one asset for another that was in high demand. Also, do you have any idea how much wealth disintegrated in 2007-2008?