June 26, 2018

Davidoff on the Economic Policy Change We Need: A Tax on One, the Other (or Both) of Your Houses

As is widely acknowledged, single family homes are now unaffordable to most new home buyers in Metro Vancouver.

Even with a downpayment of $150,000 — plus bi-weekly payments, and an amortization period of 30 years — one would need to spend $72,000 in after-tax dollars annually to service the mortgage on an average-priced home of about $1.5 million.

The median total income for households in Metro Vancouver in 2015 was $72,662. A shift in the economic and supply dynamic is very obviously required, and with a strong dose of foresight and political will.

Another reason for change — many of these single family home neighbourhoods are near town centres, employment centres and mass transit, and could otherwise be comprised of the many families and young wage earners who want to both live in Metro Vancouver, and avoid motor vehicle ownership, long commutes, and the social costs of congestion.

One potential remedy to this problem, much-debated in its breadth and scope, is change zoning policies to allow for greater densification, so more people have more housing options per square foot in more neighbourhoods.

But it’s also not so simple; the many people who occupy single family homes still own these properties lawfully, such as single families, extended families, renters, and sometimes or one or two people (including seniors, who would be thrust into a changing real estate market).

And in some cases, as we’re learning, nobody lives in these houses at all.

Changes to zoning policy is not the only measure to be considered or, in the case of the City of Vancouver and the Province of British Columbia, proposed and enacted in a variety of ways.

A new video, sent to us by Price Tags contributor Tom Durning, dives deeply into the other big measure: taxes. New ones, and increases to existing ones.

“That’s my baby, so I can tell you what the reasoning was,” says Tom Davidoff, associate professor from UBC’s Sauder School of Business.

He does, and as Durning says, “If someone would have told me 5 years ago that this dialogue would even take place, I wouldn’t believe them.”

Davidoff has been called the driving force behind a series of new tax initiatives launch by the City of Vancouver and Province of British Columbia over the past 18 months.

Veteran local broadcast journalist Stuart McNish spoke to Davidoff as part of his series Conversations that Matter; a partial transcription from that video is excerpted below, which you can watch in full on YouTube (23 min).

So I got here from California, and California is a low property tax environment. I opened up my property tax bill, saw the number, and I said, “Oh that must be for the month.”

That was my annual bill. Then I paid my income taxes, and I said, “Ah – that’s how everything is funded.” Very high income taxes if you’re a high earner, very low property tax rates.

So I happen to write a paper with a colleague…it said, in places where it’s hard to build, where most of the value in the property is land, that’s where you want high property tax rates. In a place like Winnipeg or Dallas, all the value’s in the structure. You put a high property tax in place there, the building’s going to run away.

So relative to the rest of the world, in a place where people are lined up out the door of the permitting office begging to build, we ought to have high property taxes, ’cause it doesn’t really mess with the economy.

But we have a delicate productive economy. if you tax firms when they sell stuff, if you tax workers when they work, the skilled workers and the firms, they may not come here.

What if we had a special economic zone with no income tax, no sales taxes, and we finance everything through a property tax? It would be more attractive to be rental housing, rents would be higher, prices would be lower, we’d see a lot more density — it would be a great economy. But we’ll never get there directly.

Why? Because voting is dominated here, like everywhere else, by older homeowners. They’ve already paid their income taxes, and most of the sales tax, and now they’re reliant on their home, and property taxation is painful.

So you can’t tax voters to raise property taxes. But we saw the concern about empty homes, vacation homes, pied-a-terre, Airbnb, a lot of uses where there’s no voter in the address. So what are you giving them a low property tax for if they’re not even contributing?

Look, if somebody’s already paid a lot of income tax, you don’t want to give them a double whammy on property tax, but you’re not using the property to live and work — give me a break.

So the idea was raise property taxes. We said one and a half percent. So you’d be at a total rate of around two percent, which would be on the high end of North American property tax rates, where we ought to be. And then you’re paying two percent total property tax, I don’t think you have anything to complain about, because that’s a suitable property tax. And most of the time this is not a voter.

Now, there will be some second homeowners hit. I think that’s appropriate in a place like Vancouver. We suggested that you opt in — so if you have municipality that’s really a tourist destination you don’t want to kill the goose that laid the golden egg…telling Whistler to tell Americans get out of your condo…you’ll kill the economy.

But when the workforce can’t find a place to live, what we said is raise property taxes, but only for people who aren’t either landlords or paying income tax. So that’s the idea.

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  1. What good does it do? The townhouses that replace these houses cost $2 million, the condos a mere $1.2 million. That’s not remotely affordable. Unless you choke off foreign demand nothing will change.

    1. A bit of an exaggeration.

      Home price index, Metro:

      – apartment: $701,700
      – townhouse: $859,500

      East Van:

      – apartment: $575,800
      – townhouse: $925,800

      Van West Side:

      – townhouse: $1,302,200
      – apartment: $841,700

      1. I’m talking about new-builds that all those SFH are supposed to make room for. They’re not affordable. Even the nation’s lead entity on housing, the CHMC admits it has no real clue on foreign buyers. However pre-sale condo data now collected indicates 19% foreign buyers in Vancouver and 24% in Richmond. That doesn’t even include Canadian “students and housewives” who are getting their money to buy from a breadwinner in China.
        https://biv.com/article/2018/06/foreign-investor-impact-unknown-admits-cmhc

        1. A detached home on a half lot will fetch a price roughly 1/3 less than an existing detached home on a full lot. Keep dividing the pie (i.e. build more homes on the same amount of land) and the overall list price declines, though the per ft2 price increases.

          We are now seeing the plateau of detached home prices, and the “price reduced” signs are appearing in greater numbers.

          Three years of taxing and singling out foreign buyers have resulted in exactly what so far? Not much. Meanwhile, outdated zoning artificially protects and constrains the full lots covering 70% of our limited residential land supply while interest rates remain at record lows and pumping demand, local speculation runs its course, and citizens are offered an egregiously limited selection of housing design.

          And yes, wealthy buyers, both overseas and national, pump money into this pre-charged mix at the periphery.

          China has now clamped down on citizens taking their money out of the country. In other words, even with less foreign money the market still remains hot.

          What does that tell you?

    2. Foreign demand is an easy target but a side show. It is in-migration that is the REAL driver of demand, both internationally and in places like Vancouver Island or Okanagan it is Albertans (or the odd SK person) retiring here.

      Since land prices are already high it is best to acknowledge that NOTHING will make new housing cheap in Vancouver, unless you kill the economy or reduce immigration, or better reduce demand completely. That is not going to happen nor is it desirable. The honesty is missing in the debate. Vote for me, and life in Vancouver will be cheaper, rents lower and housing affordable. That appears to be the mantra. Best to acknowledge that this is NOT going to happen.

      We need far more supply but we also need FAR LESS government red tape, fees or taxes which now takes 25%+ of cost of housing ! http://www.vancourier.com/real-estate/taxes-fees-make-up-26-of-new-vancouver-condo-cost-1.23317340 The amount of permitting, architecture requirements, regulation, fire code, WCB, building code, home owner warranty, DCCs, BP permit fees, DB permit fees etc is insane. Where is the task force to REDUCE this red tape ? Obviously nowhere as bigger and bigger government feeds off the development industry. Affordability is a good excuse to pretend government cares but on the other hand high salaries, such as 1300+ folks making $100,000+ at Vancouver city hall won’t change either. How about a pay-cut to fund homeless shelters or more modular housing ? https://globalnews.ca/news/4158835/vancouver-city-staff-salaries/

      More taxes will NOT make housing more affordable. It will do the opposite. It will reduce supply, as we will observe in 2020. Only less complex building codes & lower fees, government grants on land (or say $1 land leases for rental properties) or gov guarantees for financing. With a 70-75% presale requirement to get construction financing it is no wonder builder go abroad to get them quickly & hassle free or avoid rental buildings. This discussion needs to happen: what incentives are there, besides paying GST, plus 20%+ in government fees to build rentals vs condos ?

      “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” Winston S. Churchill

  2. I believe Tom Davidoff is on the leading edge of truly understanding the complexities surrounding the affordability crisis. He gets the issue of artificially constraining the land supply through zoning policy that in turn jacks land prices and prevents adequate numbers of rentals and the Missing Middle housing alternatives from materializing. He also looks into the actual evidence of foreign money pushing up prices and finds it wanting. His solution regarding applying levels of property taxation that are average in North America to Vancouver where they are well below the average of 2% is a whole lot gentler than mayoralty candidate Patrick Condon’s solution of hammering land owners (and by extension renters) with far higher rates based on the unsubstantiated premise that evil foreign money is the sole progenitor of the affordability crisis.

    This vid was a breath of fresh air and it gives hope that affordability can be realized without radical solutions, and that a far better city will emerge. Too bad Davidoff isn’t running for office.

    1. Tom is a smart guy and we discussed it in person. Higher taxes will reduce demand somewhat and as such is the right solution when coupled with lower taxes elsewhere, for example incomes, like we see in booming markets like WA or TX. That model could work very well in BC where many in-migrants do not have a lot of declared local incomes, but are rather affluent. Often they are either retirees (from BC, AB or SK), from abroad with high incomes there, or from abroad as a spouse or child with high net worth. All those could certainly pay more in SFH taxes as they already pay low (or no) income taxes here. Unfortunately, but as expected, that model was not proposed for BC, neither under the current government nor the previous. Renters too would benefit as they would have more net $s in their jeans.

      Today’s mortgage-free house-rich ie affluent retirees have it swell in BC: subsidized healthcare (they pay perhaps 10-20% of actual cost at best), very low property taxes, ability to defer it and low income taxes as their income is now low. Neither Greens nor NDP nor Liberals want to mess with this though. Only once they slowly die off, can this new taxation system gradually be implemented. Maybe by 2050 ? How about MSP that is $500-$1200/month as it is in EU ? or a % of your income ? How about privatizing it as much inefficiency lies in that system too .. but I digress ..

      Increased zoning will provide indeed more housing, but NOT more affordable housing. If you take an average $3M tear down in Point Grey or a similar $1.5M one in E-Van and zone it three TH units with 2000 sq ft each on 3 floors (~700 sq ft per floor), the math is roughly as follows:
      Tear down costs: $50,000
      Architecture, permit and design fees: $100,000
      Build cost: $400/foot or $800,000 .. so give or take $850,000 for each TH .. PLUS land .. so $1.35M for the E-Van TH and $1.85M for the Point Grey TH. More houses: yes. Affordable: ??

      The math gets more tricky if you take 3-4 of these lots and zone it 6 or 8 stories as the city takes 75% of the land lift as CACs, and you will end up with $1000/sq ft (or more) for condos in these new 6-8 story buildings. Also more units, but not cheap, unless city rebates CACs to build say 50% rental, capped at 30% to 50% below today’s ridiculous market rents. Where is this happening in Vancouver ?

      Add the new policy of 25% sub-market rentals and prices will go up more for the market condos now subsidizing the 25%.

      Does re-zoning make sense: absolutely, in select zones or a % of all areas, but you will not get cheap housing on expensive land !

      Only massive government interference will make things artificially cheaper by granting cash, guaranteed or subsidized financing (for rentals for example as is common in “capitalist” red state TX) free or subsidized land, or forcing higher end units to pay for lower end units.

  3. I’m obviously not getting this…

    Sure, if land is a high proportion of housing value, property taxes are a relatively non-distortionary means of raising tax revenue. (Because land supply is fixed).

    This seems like an interesting tax reform proposal, and I’m all for exploring it.

    But I don’t see how this will address housing affordability.

    Affordability must be addressed either on the demand side, or the supply side. The demand side includes restrictions and regulations to shield one group from the competition of another. The supply side includes more condos and density, or building in the ALR, which current residents loath.

    Neither solution is going to be easy. Of course, the third and most likely “solution”, is to maintain the status quo. Vancouver will be a lovely, manicured club for those lucky enough to have made it in, and everyone else can live somewhere else.

    1. All three options will / do / must happen: reduced demand through higher taxes (mainly high end though, thus demand shift to lower / smaller units and no price decrease there), increased supply and an awareness that if you want “affordable” you have to move further out. It is cheaper in Delta, NewWest, Langley, Surrey or Coquitlam indeed !

    2. “Affordability must be addressed either on the demand side, or the supply side.”

      There’s a third option. Affordability = (wages) / (house price). Davidoff only talked about that tangentially, but my read is that this is his underlying argument: he wants to shift taxes from income to property not so much in order to bring house prices down, but in order to boost the economy and lift wages up.

    3. Addendum: That’s probably also be why he doesn’t talk about reducing tax revenue or government spending. He sees taxes as the basis for a high-amenity city that attracts high-paying employers and workforce. He doesn’t want to shut down immigration because it’s also needed to fuel the growth of those businesses and “steal Silicon Valley’s lunch” (I think he said that).

      His approach seems to entail: 1) increasing supply while 2) maintaining immigration and 3) tax revenue to 4) improve amenities and 5) attract high-paying jobs.

      This is a plan to out-San Fransisco San Fransisco. There are losers though, towards the middle and bottom of the wage distribution – which I believe this is a really serious political and ethical problem.

      1. Lower income taxes would benefit all incl renters. Only more subsidized housing will help lower income folks, but city is just now starting to build some after 10 years of in-action. A big gap in the legacy of Gregor Robertson, which is mainly more bike lanes.

  4. One important point that will soon be addressed by all levels of government is building public rental housing. One assumes they will be subsidized multi-family units because that’s the standard here: public housing has the reputation of helping the poor but also as a locus for poverty and crime, sometimes because the projects are so large and single-use.

    I think there is oceans of room to change and diversify that paradigm and complement subsidized public social housing with unsubsidized non-profit (or break-even) public rental housing in mixed-use zoned neighbourhoods offering viable alternatives to the overheated private condo market.

    Thinking holistically at the community scale is needed. We are at the point where rental has been so short-changed in the hot private sale market that significant volumes of stable rental housing are required to stabilize an entire market through counterbalance. Further, thousands of rentals should help build and expand viable walkable and transit-rich neighbourhoods, and complementary continuous sidewalk retail could also benefit with stable leases and reinforce the local economy.

    We hear about the Vienna Model, which is a remarkable example of long-standing policy that resulted in both a stable housing market and diversity in design, much of it high quality. However, at nearly 80 years and $900 million a year it is a grossly unaffordable model to copy, as one mayoralty candidate proposes. Instead, incrementalism is probably the best course as long as it is maintained over many years, the rents are capped at break-even plus inflation, and the land is either a sunk cost to public finances with reasonable leases, or the purchase debt is amortized over periods longer than standard mortgages (say 40-50 years).

    Introducing non-market housing solutions at scale are probably better than any other element to adequately counter the affordability crisis at this juncture.

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