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Can taxing absentee owners fix Vancouver’s housing shortage?

September 21, 2014

COPE’s mayoral candidate for the November 15 Vancouver municipal election, Meena Wong, has floated the idea of taxing absentee home owners.

Wong, a 53-year-old community health worker and long-time activist who moved to Canada at age 19 from Hong Kong spoke to the South China Morning Post two weeks ago:

“If you can afford to come and buy a million-dollar home and leave it empty for eight or 10 months, then you can afford to pay more, a surcharge, or a surtax.”

Wong preferred not to call it a penalty but “a duty” towards helping build Vancouver.

The sin of absentee homeowners

The idea behind taxing absentee owners is to make Vancouver’s real estate market a less attractive place to park offshore money. The revenue the city would take in from such a tax would go towards creating affordable housing, says Wong.

Basically this looks, to me, like  a “sin tax”, similar to the tax on alcohol but more comparable to the tax on cigarettes.

The housing bought up by offshore investors is seen to both reduce the housing stock available to residents and to drive up the cost of whatever real estate is left over. However, no one wants to drive away the foreign investment that absentee ownership represents and as Mayor of Vancouver, Wong likely wouldn’t have the authority to make absentee ownership illegal even if she wanted to.

How are condos like cigarettes?

Society likewise says tobacco products are harmful but rather than make them illegal it applies taxes on tobacco products with the stated goal of both discouraging tobacco consumption and using the tax to offset the healthcare costs associated with smoking.

The first thing to say is that such a sin tax has no effect on the rich. It can only serve as a deterrent to poor and so-called middle class smokers.

And the federal and provincial taxes on cigarettes and other tobacco products are not set aside for health care any more than the taxes on alcohol go to reduce alcoholism.

The Federal Conservative government’s most recent surprise $4-a-pack hike in the price of cigarettes is expected to bring in an extra CAN$685-million in the 2014-15 fiscal year starting April 1 — all going into general revenue.

Over 72 percent of the cost of a 20-pack of cigarettes in British Columbia is tax, according to Physicians for a Smoke Free Canada.

A giant tax has a surprisingly modest effect

Aggressive taxation of tobacco products has certainly contributed to lowering smoking rates in B.C. by about 5.8 percent between 1999 and 2013, from 20 percent fifteen years ago down to 14.2 percent last year.

But it’s worth noting that every percentage point decrease in the rate of smoking has required billions of dollars in punitive taxation and the constant drumbeat of public education.

It’d unclear who has quit and why. No one has parsed the data to see how many wealthy Canadians have been persuaded to quit smoking because of the high taxes on tobacco products and how many were responding to education.

The “have your cake and eat it too” appeal of sin taxes

Governments can endlessly return to the well and raise the tax on tobacco products without seriously annoying anyone who matters — smokers’ moral indignation having been mooted years ago.

If the ever-escalating tax rate helps discourage smoking, that’s good;, it also helps insure governments won’t be losing any tax revenue as smokers quit.

A sin tax might not work on absentee owners

People who are rich enough to drop a few million dollars to buy a home or condo they may use only two months of the year are not going to be put off by a small surcharge — unlikely to be much more than 100 percent of the normal property tax rate.

According to one property tax calculator, the tax on residential property in the City of Vancouver is no more than 0.36 percent. Another site says 0.5 percent.

Last year, according the Globe and Mail, Vancouver house prices increased an average of 3.9%. Lose everything after the decimal point to an absentee owner surcharge and this is still a better yield than you’d get on most ten-year bonds.

Meena Wong hasn’t delved into specifics yet — that I’ve noticed — but I can’t see how such a surcharge will create meaningful affordable housing stock.

The costs of precisely identifying which properties are owned by absentee landlords are not trivial — as New York City discovered 12 years ago when that city tried implementing a similar surcharge — and then, at best, New York estimated they were looking at US$44 million-a-year from the surcharge. And they never thought to tread the minefield of pressuring absentee landlords to rent out their empty properties.

If the costs of administering the surcharge system negate much of the revenue from the surcharge then the only way such a system might improve the local housing situation is if the system compelled a significant number of those absentee owners to rent out their underutilized properties.

I see owners choosing to pay the surcharge and leave their properties “underutilized”.

Beyond that, I question whether you can legally force people to rent their properties — every condo owner I have talked to over the last few days has reacted almost violently at the mention of having to ever rent out their condos.

A world-class problem for world-class cities

The problem of absentee owners is a problem every world-class city faces. London, Paris, Jerusalem and New York City would tell Vancouver to “welcome to the club”.

And while many cities around the world have talked of taxing owners of unoccupied properties, or “ghost houses” as British Labour Party leader Ed Miliband calls them, I have had little luck finding cities which have legislatively gone after absentee owners. However the experience of the one city I did find is a doozy of an object lesson.

As one of the true “world cities” New York City has always proudly been a second home to many of the world’s wealthiest — the jet-setting absentee property owners who might spend only two months of the year in their exclusive Park Avenue pieds-à-terre.

Like crows muscling out songbirds

Many New Yorkers have watched for over the last decade in dismay as a new class of absentee owners — investors — have flocked in huge numbers to park their money in valuable NYC real estate.

A New York Times article from 2011 talks of a large swath of East Side Manhattan where about 30 to 50 percent of the more than 5,000 apartments are routinely vacant more than 10 months a year because their owners or renters have permanent homes elsewhere.

Between 2000 and 2011, the number of Manhattan apartments occupied by absentee owners and renters swelled by more than 70 percent, to nearly 34,000, from 19,000.

Author Gay Talese, who lives off Park Avenue, is quoted as describing the part-timers as “skim-milk New Yorkers — only 2 percent.”

Twelve years ago, fearing that absentee owners were something of a blighting influence on the vibrancy of street life, New York City politicians resolved to do something.

 NYC’s experience with an absentee landlord surcharge

During the summer of 2002, New York City adopted a law to impose a 25 percent tax surcharge on absentee landlords but I’m not sure it was ever applied.

From the start it turned out to be extremely difficult to administer the surcharge — the city had no idea which building were actually owned by absentee landlords.

Rather than undertake a necessarily lengthy and hugely expensive survey of New York’s five boroughs: the Bronx, Brooklyn, Manhattan, Queens, and Staten Island, the city opted to presume homeowners guilty unless they otherwise proved their innocence.

The city planned to automatically add the 25 percent surcharge to property tax bills unless an owner proved beforehand that they used the property as a primary residence or it was otherwise exempt.

This was controversial to say the least and in November of 2003, New York City Council voted to postpone implementation of the new ”absentee-landlord surcharge”. But by this time, Mayor Michael Bloomberg, who signed the surcharge into law only four months earlier was asking Council to repeal the thing.

It appears that New York City’s “Absentee landlords’ real estate tax surcharge” law lasted only three years, was never actually applied and was finally repealed in July of 2006, according to a 2012 summary of New York State and City tax legislation.

Someone’s sure to run with Meena’s golden Canada goose

I don’t for a second expect Meena Wong to be elected the next Mayor of Vancouver but I won’t be surprised to see her idea for a surcharge on absentee owners become Vancouver policy after the November 15 municipal election — no matter who wins.

Put aside the fact that I don’t really believe it can help promote affordable housing, I still recognize that it’s a lovely, bullet-proof tax idea for a city that has limited options for bringing in new tax revenue. Vancouver rate payers wouldn’t mind such a tax as long as it didn’t affect them and the offshore property owners whom it would affect don’t vote in Vancouver municipal elections. And I would expect that any surcharge would be enough to enrich the coffers of a cash-strapped city but not enough to drive away offshore investors.

According to Barbara Yaffe writing in the Vancouver Sun, the incumbent Mayor, Gregor Robertson, has “expressed interest in” Meena Wong’s idea of taxing absentee landlords.

Mayor Robertson should be interested, such a tax was one of his campaign issues when he won the nomination as Vision Vancouver’s Mayoral candidate in 2008.

On June 16, 2008, Robertson told a CBC Radio interviewer that making the owners of Vancouver’s 18,000 vacant condo units pay business property taxes, rather than residential property taxes would encourage them to rent their units, thereby increasing the number of rental units available in the city.

Consider that the current “boon” to affordable housing — the detached rental laneway home — which Mayor Gregor Robertson’s administration has really run with was actually formulated by his political opponent, the previous Mayor of Vancouver, Sam Sullivan, as part of his Eco Density initiative.

Vision Vancouver is pragmatic like the federal Liberal party of old, in the sense that they don’t like to waste politically advantageous ideas no mater what party they come from.

Other thoughts

A Fairview resident made the point that if the threat of a surcharge could coerce Vancouver’s absentee owners into renting their unoccupied properties, he still didn’t think the resulting rents — which he expected would be in the neighbourhood of $1,300-a-month — would exactly constitute affordable housing.

And shouldn’t it be said that every unoccupied property in Vancouver represents one less car, or more to the point, one less luxury SUV on the road.

It’s a fact that these days politicians in New York are a little less keen to stir the hornet’s nest of unoccupied units in Manhattan because the traffic is gridlocked as it is without having all those thousands of absentee owners driving around.

The UK has a scheme for taxing the UK rental income of non-resident landlords. And local government councils, such as in Leeds, can impose 150% of the tax rate on properties left empty for over 2 years.

This New York Times article on deterring absentee owners from May puts forward a positive alternative to punitive taxation which sounds good but which I don’t quite understand, namely, giving a tax benefit to all residents.

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