One of the main reasons of the housing crisis in the Bay Area is Prop 13 (https://en.wikipedia.org/wiki/California_Proposition_13_(197...) Prop 13 basically keeps the property taxes constant (or 1% increase) as the value of your house increases (doubles or triples). Your tax gets re-calculated only if you sell your house and the new owner starts paying potentially multiples of what the previous owner has been paying in taxes. This works great for older people who own property they can basically stay at their home forever, but it creates an unfair situation for new comers in the area and the newer generations.
How are property taxes calculated in other places in the world? Vancouver? London? Tokyo?
This is such a hard problem to solve, no one wants to force elderly people to move because of a bull real estate market, but you also need young hard working people in your city for economic growth. My solution would be to jack up the real estate inheritance tax and allocate that money for public transportation and affordable housing.
Those house owning elderly you're feeling sorry benefitted from the biggest bull market it history. They may have saw 100x gains on their house while many youth will are spending 30-50% of their income on housing if they're lucky to get a good job. If they do, they can look forward to paying entitlements to these elderly people while they themselves may never see the same turn done to them because the system will be bankrupt by then. I don't see why the elderly should be any more immune to economic realities than everyone else. If you can't afford to live in your house or city any more, at least you had an opportunity to roll the dice and make the best of your life there. Others won't even get that. What about the people who will never afford to, people who might have made a positive net improvement to the economy if we weren't so concerned with protecting people. If it gets too expensive, let them sell their house and go live out their lives very comfortably in a low cost city and open the room for people who are going to contribute to the economy that has to pay for their entitlements.
It's insane. The people who don't work live close to the business districts collecting social security paid for by the people who do work who have to commute in from afar for the privilege. Then the people who don't work vote themselves favorable property tax rules so they don't have to pay their fair share of keeping up the city.
oligarchy at micro level, creating obstacle in path of hard working common people.
Prop 13 was created by these very elderly people only, and they are now reaping its benefits while the new generation suffers. Not saying all old people are like that, but this is what it is.
I disagree. If the housing costs shoot way up, why should those people suddenly pay more money? Did a real estate bubble suddenly make it more expensive to police the area? I don't think so. The city doesn't need more money, it needs to stick to its budget.
It's not about raising more money, it's about fairly apportioning the tax burden. Why should two homeowners with the same value of property pay different amounts of taxes just because one is old and has owned the house a long time?
On the other hand, why should your tax bill go up simply because other people are willing to spend increasingly large amounts of money to buy a house like yours?
It's not like income tax where your tax bill only goes up when you get more money to pay it with.
One can argue that it should be the opposite of an income tax.
If the value of your house goes up because you remodel the kitchen, then it seems fair that you should be able to pocket that value. You did the work, so your taxes should not increase.
If the value of your house goes up because the government opens a new light rail station nearby, then you did nothing to earn this, so it seems fair that society should be able to get higher taxes from you.
In a speculative bubble, you did nothing to earn the extra value, but---arguably!---neither did the government, so it is less clear cut.
The taxes should indeed go up to optimize land use in general.
If you have a house built in 1902 in the middle of a big city, you're paying minimal taxes and find yourself surrounded by high-rises, it's very inefficient land use. Your lot could provide housing for hundreds if not thousands of people if another high-rise was built there.
Thus, you should either pay for your privilege (in taxes) or sell the lot (for a lot of money, presumably) to let other people use the space more efficiently.
However, I must say that a property tax itself is a wicked one and should be replaced by land value tax. Land is more valuable in the centre than in the outskirts of the city, so when properly taxed it creates the tendency to increase density of the highly taxed land and allows for more liberal land use where nobody else wants to build.
Property value goes up if you build a bigger, better building on your lot so you might as well stick with the old one. That promotes stagnation and under-use: it might not make sense for an individual or a business to give the lot to better use and move further away to enjoy lower taxes if the location is not particularly important.
In contrast, land value goes up in the average if a lot of people keep building desirable buildings in what turns out to be a desirable district in the city. That promotes what people like. Consequently, inefficient land uses move further away from the desirable areas.
Implementing neither property tax nor land-value tax is not straight-forward in general and there are corner-cases that need to be sorted, but in general land use is what ultimately provides its value. Often property tax codes already incorporate parts of land-value taxing, but the intrinsic value of property to be taxed is debatable: what is the value (to the community) of a small, low-taxed detached house in the downtown versus a huge, high-taxed mansion outside of the city? The opportunity cost of taxing property might be huge.
Your tax bill doesn't go up just because the value of your house goes up. Your municipality has to vote to spend that extra tax revenue instead of cutting property tax rates. If they do that (and remember old people are the dominant demographic of voters), why shouldn't people pay more?
Because when their own bills go up, they have an incentive to vote for things that bring the cost of housing down. When they don't have to pay for the cost of housing, but instead personally benefit through increased housing value, they will of course vote for it.
The thing is, when the tax burden is evenly spread out, it will rise more in step with the amount of money needed by the city (as decided by voters), not so much the price of the house. Indeed, in a (largely mythical, I know) well-run city, the property tax (in pct) should go down as prices rise. Right now, many California cities are broke, and their only way of raising revenues is to soak the newcomers.
Because the person who has owned the house a long time doesn't have higher income to make up for it, they're likely a retired person on a fixed income.
Since you want them to move out so bad, why don't you have the government pay them to move out? I never see these local governments offer to pony up $10k or so for the moving expenses for people priced out of their houses to move out. These people bought a house in a town thinking it'd be a good place to settle down, not that they'd be forced out of their house in a decade or two. It's really no better than forced relocation, which is a form of genocide.
It's not as extreme, but it is similar. Forcing people out of their homes is usually frowned upon when it's some Natives being forced at gunpoint to pack their stuff and walk across the continent, but somehow when it's old retirees being forced to sell their house just to pay the taxes and then hope to find a new place to live somewhere, where they don't know anyone and are completely unfamiliar, that's somehow OK. It's really the same thing as gentrification, just that it's a different demographic.
Prices don't rise spontaneously (or not exactly). There's increased demand, which usually means more people living and working in the area. Therefore, in fact the cost of policing and everything else does increase.
Yes, they do rise spontaneously. There are not more people living and working in the area: the prices of the existing houses have risen, just because of speculation and flipping. It's not like there's more people getting packed into these houses (for the most part).
You only get more people living and working in the area if you build more houses. If you do that, then of course you're going to have more property tax, even if the existing house values don't change at all. New houses = new property taxes. That's how you pay for the extra policing, not by soaking the existing residents.
This is the argument of somebody who is profiting or care deeply about somebody who is profiting from this.
1% is less than the inflation (even more so is the real estate is shooting up), this means that city spending will increase by more than 1% and that other younger citizens will have to pick up the slack.
The City of New York is just building a new police station in an area that's been fully built up for roughly 150 years. http://www.dezeen.com/2016/02/01/big-bjarke-ingles-new-york-... I expect the Vancouver police department also ends up paying its officers extra to cover the boomtown rents.
(Not just police, of course. All public services.)
When my car wears out and I need a new car, I don't go to my boss and say "hey, I need money for a big down-payment on a new car, so I need you to give me a big raise." And then, 5 years later, come back to my boss and say "I need yet another new car, so I need yet another big raise to pay for it."
Instead, I save money over time so that when I need that new car, I have the money already saved up for it. In fact, I've saved the money because, over time, my old car has gotten cheaper to own (lower insurance, lower registration fees, loan paid off), and I've budgeted for transportation expenses over all that time so that the new
car cost isn't a big surprise.
So please explain to me why the existing taxes for police services aren't enough for them to save up and budget and buy new buildings as necessary.
As for boomtown rents, that's not a problem either. The boomtown means that property values are skyrocketing, which means that property tax revenues are also skyrocketing, so they're already making more money without even having to raise taxes. So why do they need even more?
You started by asserting that the police budget need not increase when there's a property boom.
Perhaps the town of Starnberg is an instructive example. It's a small town in Germany which hasn't grown much in terms of population, but its property market has boomed, BOOMED, enough that the city's employees had problems. Rents increase, their salaries don't.
Last time I was there the local newspaper reported that for several years, the only police officer who worked there voluntarily was the chief. The force hadn't had a single application to any of its job postings for years, and all the old police officers had gotten better-paying work or moved to lower-rent towns. German police can be ordered to serve for a while, and the Starnberg city police force was composed of newly educated police officers who had been ordered there by the state, lived on 10m² while they had to, and who left Starnberg as soon as they were legally able to.
I understand the city council was trying to find some way to solve this. To pay the employees a sizable extra to compensate for the high cost of living. (Haven't followed the news there.) Anyway what employees said wasn't "I need another new car, so I need a new raise", they said instead "I need another new car, so I got a better-paying job, goodbye" or "I need another new car, so I'm moving, goodbye".
You are attacking the wrong people. Prop 13 applies to business real estate as well. This is the true problem. Before Prop 13 business was paying 2/3 of the property taxes now business is paying less than 1/3.
The problem isn't the elderly, the problem is that Prop 13 includes commercial properties
An expensive house doesn't make you richer unless you're selling it and live somewhere cheaper. And in our society it's a given that predictability of costs is one of the benefits you get from buying a house.
Okay, and? So they can and should go and do that. Are you insinuating it is a hardship that they have the option to liquidate and easily move to a cheaper area and pocket a million dollars?
Yes, especially since it's not because of anything they've done. Being forced to leave where you've lived your life, where your friends and family is, because of money is definitely a hardship.
Not accounting for inflation, it's not hard to believe:
Median Home Values: Unadjusted
2000 1990 1980 1970 1960 1950 1940
California $211,500 $195,500 $84,500 $23,100 $15,100 $9,564 $3,527
The median alone is almost two orders of magnitude greater as of 2000, let alone 2016. I'm sure there is at least one bay-area home that has been untouched for 50 or 60 years that is now selling for well over a million.
You realize that somebody who bought in 1940 or earlier is over 100 years old now, right? (assuming becoming a homeowner at age 25). Not a significant demographic.
Beyond that, those numbers are fudged and do not reflect the changing value of the dollar. $3,537 in 1940 is $59,711 in 2015 dollars[0] (or $43,382 in 2000 dollars[0]), so your "two orders of magnitude" claim falls to a mere factor of less than 5 times, or < 5% of the "two orders of magnitude" claim.
And again, that isn't even a level comparison given that housing construction costs are far higher (well beyond the rate of inflation) due to more features, stricter building codes, modern appliances, permits, ...
Parts of Palo Alto were very blue collar post WWII. I knew one nonagenarian who bought his house new in 1949 for $10k, and it sold, unimproved, for $2.2m on his death over a year ago. Also a centenarian still living in her original 1950 $10k house that Zillow now estimates at $2.3m. So, there's 220x gains. Clearly, all the value is in the land. Property tax in 2013 was about $1k in both cases; both have new neighbors in newly-built $4m houses on same-size lots paying $40k tax.
So what you are saying is the person who just spent their entire life, 40+ years helping build the city they live in, should now move away to a small city that no one else wants to move to? And they should do that mainly because other people now want to enjoy the fruits of the elderly labor?
If they can't afford it, then yes, they should find other accommodations. How is that any different than the rest of us have to live? My wife lives in New York, while I live in SF because that's what we have to do.
It's even worse in Australia, which most properties do not have a yearly property tax. So you pay a 'stamp duty' when you purchase the property, based on a % of the sale price.
This means you have people living in Sydney with multi-million dollar properties - which are just modest houses in now-desirable suburbs - who haven't paid any property tax since the 60's, and who can't move anywhere because they'd be up for so much stamp duty in one hit (easily 50-100k).
Furthermore, the state government has unpredictable revenue streams based on the ups and downs of the property market (you can have high prices but low volume) and the labor market is more calcified because people are unlikely to sell and move to access a new job.
The result is tightly held real estate, variable state government revenue and ever-higher prices. Adding fuel to the mess is a universal belief by local governments that housing development is evil and must be curtailed, so they concentrate on high density and infill development, which drives the prices of stand alone property ever higher.
Unsurprisingly, Australia just about outpaces Canada for the most severely unaffordable housing market.
And yet if you ask the average person in the street, they will blame 'interest rates' or 'Chinese buyers', and not once look at the ridiculous blockage on supply.
> This means you have people living in Sydney with multi-million dollar properties - which are just modest houses in now-desirable suburbs - who haven't paid any property tax since the 60's, and who can't move anywhere because they'd be up for so much stamp duty in one hit (easily 50-100k).
I don't understand. When you're making millions on the sale of the property, how is 100k in stamp duty a problem? It's on the same order as your agent's commission!
Why isn't every house incorporated (bought by a company, then have that company bought/sold instead of the house) ? Note: this is how it's done for a lot of houses in western europe, and there it's a 100% legal way to avoid this tax.
The problem is that you're going to have to pay 30% company tax on profits, and it's hard to get a mortgage. However this can always be structured so there aren't any profits (e.g. by improving the house, saving up for another house, ...)
I've read that Californian municipalities say that transferring control of the company that owns a property results in the underlying property being valued at current market prices. They'll get their tax regardless.
Your primary owner-occupied residence is exempt from capital gains tax in Australia. If you put a corporation in the middle, that exemption might vanish? (I don't know too much about the legal shenanigans here.)
If you want to leave your 4 bedroom, 1 million dollar property and buy a 2 bedroom, 1 million dollar apartment, you have to forego 100k just to do this? Obviously most people choose to not move. They'd rather the money goes tax free to their kids, or to just borrow against the house and spend the money.
It's a strange attitude to suggest that paying $100k to the government is 'not a problem' just because your house is worth more. If you were in the same position I think your attitude would change somewhat.
Its the exact same thing here in Vancouver, there are even protests because someone is going to tear down a small house that fits one family and build a bigger house on the same property that fits multiple families.
We have a low interest rate fuelled asset bubble and 1%'ers are complaining that they can't afford detached housing in Vancouver, never realizing that if everyone in Vancouver live in detached housing we'd need 150% of the available land in Vancouver (like no roads, offices, parks, pools, etc just detached housing)
It's stupid to expect to be able to live in detached housing in a world class city. The other thing is that Vancouver isn't really a 'city' in the way that many others are, the 'burbs are separate cities so we get this 'most unaffordable' label when its really much better than many other cities.
Its the exact same thing here in Vancouver, there are even protests because someone is going to tear down a small house that fits one family and build a bigger house on the same property that fits multiple families.
This is new - has the owner said that multiple families will live in that house?
It's stupid to expect to be able to live in detached housing in a world class city
Since when did Vancouver become a world class city? I don't mean that to be cruel; I live here myself. But Vancouver has neither the culture nor the power nor the money to be considered world class. The people are poor, the economy has a paucity of opportunities, and now the housing really is only marginally affordable, even if you go out somewhere crazy far like White Rock.
>The other thing is that Vancouver isn't really a 'city' in the way that many others are, the 'burbs are separate cities so we get this 'most unaffordable' label when its really much better than many other cities.
What are you comparing to? Here in the US, it's exactly the same. Every single "big city" is really a metro area with a core city that bears the famous name, and a slew of separate cities bordering it. "Phoenix" for instance is a collection of a bunch of cities: Phoenix, Mesa, Tempe, Chandler, Glendale, Scottsdale, Gilbert, Paradise Valley, Sun City, Peoria, etc. "Los Angeles" has more cities than I can count. "New York City" is a little more centralized (since the city annexed a bunch of the bordering cities back in the late 1800s, turning them into "boroughs"), but still has White Plains, Tarrytown, and cities in bordering states like Stamford, Jersey City, Newark, Bayonne, etc.
Maybe European cities are singular like that, but not here in the US.
And yet if you ask the average person in the street, they will blame 'interest rates' or 'Chinese buyers', and not once look at the ridiculous blockage on supply.
I think that this is the other dimension to the Vancouver housing problem that no one is talking about yet. Vancouver is separated from the rest of the province by the Fraser river to the south-east, and regional development policy for about 30 years has been fashioned to make it difficult for anyone to live south of the Fraser.
If we put more bridges across the Fraser and built more highways, I think most of this problem would go away on its own.
no, it's all diked appropriately for the most part. Of course some would like the diking to be improved as there has been some minor flooding every 20 years or so. But that flooding is typically limited to the lowest areas which are almost always agricultural land. It would be a huge stretch to say the area is prone to flooding.
At this point they need to be widened and expanded.
What I'm advocating isn't simply a one-off highway and bridge expansion; rather I want the regional development plan scrapped and I want a new one that no longer treats Richmond/Delta/Surrey as a separate development region. Rather than fighting and antagonizing families who want to live south of the Fraser, we should try to integrate Delta and Surrey more completely with Vancouver and Burquitlam. Highways to bring people to their jobs in Vancouver, yes; but also a focus on encouraging businesses, perhaps through preferential taxes, to locate in Delta and Surrey. We should be planning, zoning, and developing to minimize the presence of the Fraser. That would include more bridges, but it would also include more mass transit.
And if we need to pay for this somehow, I can't think of a better way than a non-linear property tax on everyone west of Cambie. ;-)
This sounds like an excellent argument for getting rid of property taxes altogether.
Property taxes have some major fundamental problems, not least of which that using them to pay for local services tends to make such services better in more affluent areas and worse in less affluent areas. They produce potentially unbounded and unexpected expenses long after paying off the house itself (which impacts retirees and others trying to predict future expenses). And on top of that, as mentioned in the comments here, attempts to control the growth of property taxes can create major supply issues in the housing market.
So why not get rid of property taxes altogether? Most states/countries already have either income tax, sales tax, or both. Why not settle on one tax, either income or sales, and use that for all government expenses?
You are proposing to remove taxation on a bull market (property)? This would inflate prices even more, as investors make a run for nice tax-free properties. It doesn't make sense, sorry.
You need to remove incentives to invest in property altogether. It's one of the worst and most unproductive markets, and not even a market in practice because everyone needs a home. My personal pope-emperor utopia would forbid companies from owning residential buildings, and tax individuals 10% of house value yearly on any house (with the first two exempted). Redevelopment should be allowed only when the area is in clear state of abandon, with strict rules on the amount of commercial space that can replace residential space.
The property market needs to die -- and I say that as a homeowner.
I'm talking about taxes on personal residences, used as residences. I don't particularly want to argue in this post about what taxes might apply to second/third/fourth/investment/etc houses, or about the desirability of using excise taxes to control behavior.
In the context of property used as a residence, I'm suggesting that property taxes produce undesirable effects, and that other forms of taxation might potentially work better.
But that's what inflates property markets -- investors buying and selling multiple properties, realtors identifying and driving growth in this or that neighbourhood. London, SF, Sydney or Vancouver are all awash in investment cash for properties, that's what drives prices.
"In the context of property used as a residence", most European countries do not tax first homes, end of story. It doesn't stop prices from growing.
> "In the context of property used as a residence", most European countries do not tax first homes, end of story.
I'm not talking about sales taxes on the sale price of a home; the US doesn't tax those either. I'm talking about property taxes, as in the taxes typically assessed by a local government to property owners as a percentage of the appraised value of their property. I'm saying that such property taxes produce various undesirable effects (as mentioned several comments up).
That's orthogonal to questions of how to deal with people owning, buying, or selling multiple homes. It may or may not make sense to apply different rules in those cases, such as not providing an exemption for sales taxes on such properties. (Though you'd have to be careful there to not cause problems with rental prices.)
Here's an idea. Make utility services scale with people density. Relax restrictions on how much they can profit off sqft. Single home dwellers are penalized with increased upkeep costs and higher density buildings are encouraged.
What? That's crap. Why should single home dwellers have to pay more for water and electricity and gas just because their house is bigger? Then you'll have apartment dwellers running the heat with the windows open.
Utilities should be paid per-use, just as it is now. People with bigger houses are naturally going to pay more because a bigger house usually needs more power/fuel for HVAC, unless their house is more efficient. Also, we need to incentivize making homes more energy-efficient, and regressive policies like yours discourage efficiency. Smaller isn't always better; crappy old small houses and apartments can easily use far more energy than new McMansions.
And that leads me to one big problem in the rental market is that landlords never spend a dime on improving or renovating homes for better energy-efficiency, because the tenant has to pay all the utilities.
Water and electricity and gas are generally less cost-efficient to provide to less-dense neighborhoods, as the length of wire & pipe (and maintenance overhead) needed to serve a given number of residences is significantly higher. This is likewise why electricity and phone service were not provided to rural areas until subsidized by the government by taxing urban dwellers.
To new neighborhoods, you're right. To existing neighborhoods, you're wrong: the infrastructure is already there. There's no reason to raise rates for people for something that's already paid for. That's like adding a toll to a road that's been there for 50 years; it's just profiteering.
Maintenance is not going to be any higher for lower density; it's not like you see electric utility workers in the suburbs constantly, repairing stuff. And access is more difficult in higher-density housing too: in a suburb, you just drive the truck up to the transformer, but in a large building, it isn't that easy.
As for rural areas, there's a huge difference between urban and rural areas (where houses are miles apart), and urban and suburban areas (where houses are 20 feet apart).
> And that leads me to one big problem in the rental market is that landlords never spend a dime on improving or renovating homes for better energy-efficiency, because the tenant has to pay all the utilities.
If that were the case they could charge 'fixed utilities' at a reasonable price and then when they upgrade for energy efficiency they reap those gains.
You mean force the landlords to pay for the utilities? Doing that means the tenants then blast the heat with the windows and doors wide open: they have no incentive to be economical with their energy usage. All it takes is one bad tenant like that with $2000/month utility bills and the landlord has to declare bankruptcy.
Why not just have some kind of regulation requiring rental dwellings to meet certain energy efficiency standards? And combine this with some programs to help landlords upgrade, perhaps with low-interest loans or something.
I am not a proponent for taxes, most of my arguments centre around the idiocy of most taxes. And you are correct in your analysis, particularly as the improvement component on the land is already taxed by sales taxes for the materials and income taxes for the labour.
However, it's best to tax broadly and close to the generation of income.
I think land taxes couples with sales and income taxes is an efficient combination. Land taxes penalise land banking, and encourage the most efficient use of land.
Sales taxes penalise consumption, and encourage savings or investment.
Of all, income taxes penalise earnings, but earnings are unavoidable for most people. But they do incentivise investment income where there is a differential, which could be mildly beneficial.
The key to all these is uniform applicability and flat rates. The massive drag that tax minimisation has on an economy is underestimated routinely.
From the property front - land taxes should be paid annually, there should be more releases of land with fewer restrictions, and there should be no/minimal transaction taxes to go in/out of a property.
It's the land value tax that incentivizes more efficient use of land. A property tax is levied on both the land and the improvements built on top of it. By only taxing land, the land use tax incentivizes maximizing the improvements-to-land ratio.
Improved land tends to draw more from community resources. If we just tax the land, someone builds a huge apartment building, then it really sucks for the local schools.
Additionally, much speculation is in post improved land...e.g. apartments; they have to do something with their property also, not just build it up. Otherwise its a drain on the economy and distorts the real estate market.
An appropriate land value tax is proportionate to what improvements the community expects to be present on the land on average -- that is, how desirable the area is as a whole. That should scale pretty well on a school district level.
As for discouraging speculation, property and land tax schemes can both be used. However, in an environment in which other landowners are improving, the tax burden of a speculator just sitting on their property goes up under a land value tax.
How are property taxes calculated in [...] London?
Properties are assigned to a tax band based on the tax office's assessment of the house's value were it to have been sold in April 1991. Bands vary from A (less than £40,000) to H (more than £320,000).
The council tax ratios between the bands are fixed - so a band A property always pays one third the price of a band H property. The band a house is assigned to is essentially permanent, although you can appeal if it's not in line with equivalent properties in the same area.
This provides certain desirable properties - more expensive properties pay more, but your bill doesn't go up just because house prices in your area go up.
Disadvantages are your tax bill can still go up - just it goes up for everyone by the same percentage; if an area has become much nicer (or less nice) since 1991, the council doesn't make any more (or less) money; and valuations based on a government employee's estimate of a hypothetical sale don't have the idealogical purity needed to really get the support of voters.
There is a very enjoyable irony to the notion that you would accuse a community of groupthink for a perceived lack of accepting your opinion as the one true way.
The only opinion I was expressing was that of surprise the down vote for a perfectly decent comment, it seemed to be related to the topic, rather than the comment. I admit, the group think statement is a hypothesis, but not an unreasonable one given the circumstance.
Prop 13 has nothing to do with real estate price inflation. If anything, shifting of property tax burdens from long-time homeowners to new homeowners would tend to suppress prices. Shifting that burden evenly across the population would tend to cause more churn as long-time homeowners get pushed out, but would do nothing to increase aggregate housing or lower aggregate prices.
Although, you can get pretty far into the weeds trying to evaluate the effect of housing stability on political economy - NIMBYism would be expected to be stronger in longer-tenure populations, for instance.
Stability of tax policy is a fantastic thing for encouraging long-term investment.
A 4-bedroom house bought in the 70s is far more affordable than a 1-bedroom condo bought today, which creates a situation where no one can afford to move out of their homes. It's a massive tax benefit for themselves, their children, and grandchildren, that instantly and irrevocably goes away when they sell the house. No matter how high the market drives prices there is little incentive to sell.
I don't know how much this has to do with the shortage of supply in the bay area but I'd be very surprised if it has "nothing to do" with it.
That is not a fair assessment of the situation. There are a number of factors that have been put in place by the populace and government agencies to force this situation in the bay area:
1. Rent Control: This forces an incentive not to move. If you are in the 4-bedroom house at $1,500 a month for the past 15 years, a comparable 4-bedroom house is now $6,000. There is no incentive to move and owner's have little incentive to bring up to standard something they are not going to get an ROI on. In this instance, Prop 13 actually makes the situation bearable for the landlords, think if the costs went up and your return stayed static.
2. Building Restrictions: Between the historical board, local populace anger to building, and zoning enforcement, the bay area's supply has been static while demand has increased. There are workarounds, but they border on illegal (i.e. the guy who turned a storage closet into a baby's room for additional space); essentially sub-dividing up existing property.
Within the Bay area, the ability to move a demand curve down has not existed, so the prices have risen to meet the existing supply. Prop 13 has no direct effect on these two items except a positive effect for the landowners in reducing the tax burden that would have forced early bankruptcy for them because of the rent control.
If you think of the government as the "ultimate landlord", then property tax is just another form of rent and Prop 13 is just another form of rent control. It has most of the same positives and negatives as rent control:
> forces an incentive not to move
Check, if you move your property tax will go up
> and owner's have little incentive to bring up to standard something they are not going to get an ROI on
Check, the "landlord" (government) spending on residential infrastructure won't result in increased property tax income. This is partly why the peninsula cities invest so much in office space but refuse to build housing.
You're right that Prop 13 makes rent control possible, but overall I'm not sure that's a good thing.
<You're right that Prop 13 makes rent control possible>
Completely false; the Jarvis-Gann Amendment ("Prop 13") has nothing to do with rent control.
You may intend to instead argue that both JGA and rent control provide disincentives to move (and I would not disagree), but that's a different statement.
You're being down-voted because Klipt is agreeing with GP that by holding down the costs of property owners Prop 13 makes the holding down of property revenues by rent control more tolerable for the owner.
No, I'm being downvoted as a protest proxy against Prop 13, which I didn't advocate or defend -- I just tried to clarify the history. (I wasn't even of voting age when it passed.)
Rent control existed in many CA cities well before Prop 13 and is orthogonal. The impetus for Prop 13 was that frequent and growing property tax rate (as well as assessment) increases during Willie Brown's control of the Assembly, combined with high mortgage interest rates, were driving longtime residents (especially seniors and others on fixed incomes) out of their homes.
Most rental property owners are not lifelong, continuous owners that benefit significantly from Prop 13, and I guarantee you that those who are aren't giving any rent "discounts" because of Prop 13 savings -- the market (and law) sets the rents.
Those houses are lived in though (ignoring the whole issue of unoccupied investment properties). You can have an illiquid market with a ton of housing stock. The Bay Area has a problem with insufficient total housing stock, not with tax policy. You can see this via rental market prices, which are not locked-in like property taxes are.
Imagine a Soviet grey-concrete apartment block. You get on the list when you're 18, and get your "free" apartment five years later, in which you are effectively stuck for the next 50 years. It's illiquid, there is high supply, there are low prices.
Now imagine you can swap apartments by paying a huge bribe. It's still illiquid, there is high supply, there are low average prices, there are high marginal prices.
Not necessarily. I've been seeing several ex-rental units which have recently been passed down as part of an estate.
Inheriting a house doesn't result in a valuation event, and the seller has nothing encouraging them to sell. So, the house sits there empty - They're only paying $100/month in taxes, which is coffee money.
The combination of no capital gains on inheritance, no estate taxes and ancient property valuations creates a multi-generational issue where houses are kept locked up.
The problem is staying becomes increasing attractive over time. Retired people save money by staying put, young workers can't afford to move in. This breaks the housing market.
SF is not a housing market it's effectively a planned communist community with a few bribes on the open market.
> Retired people save money by staying put, young workers can't afford to move in.
This is a problem of housing stock. If you build more housing, it's not going to be occupied by people who've been sitting on it for the last 50 years. That's impossible, because it's new.
Well sort of. Consider a couple in a 4 bedroom house who's kids have moved out, but don't move into a smaller place (say 2 bedroom condo) because they would have to pay a bigger tax bill. So there are two bedrooms not being used because of taxes.
> Consider a couple in a 4 bedroom house who's kids have moved out, but don't move into a smaller place (say 2 bedroom condo)
This would theoretically deal with the problem of having young couples with many children who can only afford to live in a 2-bedroom condo, because all the bigger housing is occupied by old people with empty nests and the only new housing is 2-bedroom condos or smaller. But, if you're not interested in forcing the old people to leave, it doesn't solve the problem of housing supply -- you'll still need some housing for the old couple and some more, separate, housing for the new large family, and if you don't build additional housing to accommodate the incoming people you'll end up with a housing shortage, regardless of whether old people shift from their existing homes into smaller ones or not. As long as you're building housing for the people who move in, you might as well build it in the sizes they demand.
If it was reassessed today, they'd be paying 40-45k.
If they do what most people who have lived in a home forever do, and are downsizing to something smaller (IE kids grew up, whatever), they will likely end up with either the same or less in taxes they pay now.
So it's not like right now they pay nothing, and they'd pay a ton, it's "they pay a lot, they'd pay more".
Just a single data point, but my parents bought their single family home in sf in 1972. It's currently worth about $2M. They pay roughly 400/yr in taxes and as a result there is no incentive for them to ever leave.
That's quite the leap. How about you check out some broader data sets and then reassess your statement. There is less demand for homes at that price point. There is a MUCH bigger crunch for "entry-level" homes that doesn't look like it will go away any time soon.
In this discussion there are a lot of terminology considerations around "supply" (ie, housing stock) vs. "liquid supply" (ie, houses on the market) and "average prices" (ie, total RE value) vs. "marginal prices" (ie, expected home sales price).
> Prop 13 has nothing to do with real estate price inflation.
Its hard to imagine the current real estate inflation in the case where home owners had to pay taxes against the fair market value. In other words, home owners would at least see some value in new construction. As it stands now, there is only downside.
>Its hard to imagine the current real estate inflation in the case where home owners had to pay taxes against the fair market value.
Prop 13 exists in California because that's exactly what was happening. Prior to its passage you paid on the assessed value of you house, and it didn't stop prices from double digit percentage increases every year.
People who'd owned their homes for decades were being forced to sell because the assessed value of the house had gone up so much they could no longer afford to pay the taxes.
While that sucks, that sort of self-correcting market pressure is in fact required for a healthy real estate market.
Yes, people would have been pushed out as prices increased. But as areas gentrify, there is no guarantee that the farmers and tradespeople who lived there get to stay forever. That's how other markets work.
It sucks to those pushed out, but eventually taxes increase to the point where demand for the area diminishes. Further, since you'd have increased liquidity without Prop 13, people could actually afford to move to other areas so there would be more inventory. As it stands, that isn't happening because people can't afford to move, so the market is locked up. If we didn't have Prop 13, my gut says that the broader Peninsula would not be impacted to nearly the degree it is now (although perhaps SF would because it is so much smaller).
People being forced to sell because their areas taxes increase substantially is an unfortunate, but very necessary thing.
You say that's how other markets work, but I can't think of any other market where an increase in the price of something you already own can make owning it unaffordable. If I buy stocks, or gold, or a car, and it gets more valuable, I'm not taxed until I sell, right? Does the same argument hold for those?
I'm referring to other real estate markets in the country.
Also, in this case, if the price of your home appreciates, it is likely the price of other homes appreciated, so your gain may not actually amount to anything (particularly after realtor fees). Likewise, you are taxed every year on real estate.
>Further, since you'd have increased liquidity without Prop 13, people could actually afford to move to other areas so there would be more inventory.
People over 55 can transfer the tax basis of their primary residence. In all cases if they move somewhere in the same county, and depending on local ordinances inter-county.
So retired people living in the Peninsula can afford to move to other areas.
What you're leaving out of the equation though is that often times people that old who have lived here forever either have their home fully or mostly paid off. Sure it likely appreciated quite a bit, but depending on their savings, they may not be able to afford a new home in the area at market rates regardless of the tax situation, especially if they are retired and on fixed income. So instead they stay in their home and don't sell. Or they pass it on to the next generation who doesn't sell.
Eh, why would they not be able to afford a new home after selling the old one? Usually when people retire they're looking for a smaller home that's easier to take care of.
How does Prop 13 work? The people who wrote that paper are saying that it is a subsidy; absolutely not. The tax rate is frozen, so as I understand it, the person simply pays a lower rate, it is not a system where a tax is paid and then has it refunded to them.
I am going to be highly critical of an economic research paper that looks at a tax as a subsidy, so here we go:
1. A tax rate lower because of a law than your neighbor is not a subsidy. A child deduction on an IRS form is not a subsidy.
2. The average length of stay for a home owner was increased by .11 years for Bakersfield, 2 years for Los Angeles, and 3 or more year for the Bay Area. Bakersfield, as far as I know, has no rent control, so there is an argument that this is essentially a rounding error. Los Angeles and the Bay Area are rent control cities, no where in the paper is this brought up as an externality forcing the longer periods of tenure ownership.
3. Table 1A shows that rental tenure increased from 4.30 to 5.25 years from 1970 to 2000, this is essentially the same increase as that of 10.76 years to 13.42 years for the home owners; 24.7% for the home owners and 22.1% for the renters. This should invalidate pointing to Prop 13 as the reason for longer owner stays.
4. Florida and Texas pass the same law and the paper simply says, forget them. The two states, Florida and Texas, go on to show that there is no impact from Prop 13, thus further invalidating their study.
5. Not one mention of rent control being a reason why people may not want to move out of their existing dwelling and purchase a home.
This may be a good paper to reference as a point, it is a horrible paper by ignoring externalities, comparable examples, and not examining differences between areas (Bakersfield vs. Los Angeles vs. San Francisco).
No doubt it reduces liquidity. Probably increases marginal prices as well. But I doubt it makes real estate more valuable in the aggregate except for maybe via second-order effects like policy stability or population composition.
Real estate has value because of the potential flows of rent that can be obtained. Property taxes fall on both land and improvements. While the taxes on improvements are passed on to the tenant, the taxes on land cannot be, as Adam Smith showed. The rent of land, being a case of a locational monopoly, is always as high as it can be.
Thus, taxing land simply reduces the flows of rent that can be kept from controlling a location, and thus reduces the purchase price.
This makes it easier for entrepreneurs to acquire land, since the up front costs are lower.
I hadn't heard of this principle that it's impossible to pass tax increases on to tenants. I can't really believe Adam Smith has shown this to be impossible, when I know people who have said (paraphrasing), "The previous landlord has raised rents to match increases in taxes, water, garbage bills(the utilities are effectively costs of land), and we consider this reasonable".
I feel like you could even make a bet on it: There's a nearby trailer park with some mobile homes on it. This should have value solely in the land, since the homes can be removed from the property. I'm counting the availability of utilities in the land. The county tax assessment on both land and improvements is public information. Suppose the tax assessment as a whole goes up 1.7%. If the trailer park owner is able to secure a 1.7% increase over the next year from his tenants, you pay him $10,000. Otherwise, he pays you $10,000. Do you trust Adam Smith enough to take that bet? It should be impossible, since that 1.7% includes an increase of taxes on the land which you're saying cannot be passed onto the tenant.
> Prop 13 has nothing to do with real estate price inflation. If anything, shifting of property tax burdens from long-time homeowners to new homeowners would tend to suppress prices.
As I see it, the long-term expected costs for a purchaser with an average expected time to hold are neutral compared to an equal-revenue scheme that didn't favor long-term property owners over newer property owners. (Given the same assessed value.)
OTOH, the future costs of holding property are lower compared to the same alternative for current property holders (since, even with a short holding period, some of the early, highest-relative-tax-burden years are sunk costs under Prop 13) under the same comparison.
So, rationally, people are just as likely to want to buy property, and less likely to want to sell it once they've already bought it. This reduces supply and increases market clearing price.
> Prop 13 has nothing to do with real estate price inflation.
Yes, it does, because it incentivizes municipalities to encourage commercial development (which tends to change hands more often) over residential. It's a classic unintended consequence.
Corporations have been dodging taxes via Prop 13 for some time to the tune of potentially a $9 BILLION dollar windfall should they close some of those loopholes.
I've heard of things like companies buying businesses outright so they can get the property, without buying the property as a transaction with the other entity.
Yes, and corporate inversions are another example (and another effect of tax law enforcement).
The answer would be a Constitutional Amendment changing Jarvis-Gann protections to residences only, or even primary owner-occupied residences only. But the corrupt Legislature refuses to consider putting an LCA on the ballot to change this.
"Building Less Housing Than People Demand Drives High Housing Costs. California is a desirable place to live. Yet not enough housing exists in the state’s major coastal communities to accommodate all of the households that want to live there. In these areas, community resistance to housing, environmental policies, lack of fiscal incentives for local governments to approve housing, and limited land constrains new housing construction. A shortage of housing along California’s coast means households wishing to live there compete for limited housing. This competition bids up home prices and rents. Some people who find California’s coast unaffordable turn instead to California’s inland communities, causing prices there to rise as well. In addition to a shortage of housing, high land and construction costs also play some role in high housing prices."
Another thing to keep in mind regarding prop 13 is that it also affects commercial real estate - commercial landlords tend to set up a company to own/insure/maintain a building, and then rather than selling the building they just change the beneficial ownership of the company, preserving the low property tax rates.
As a homeowner myself I'm being a bit hypocritical here because we bought at a low point in the market and now pay a fairly low rate of tax relative to the change in the property value, but on the other hand that outcome was the result of years of waiting for an opportunity to time the market.
How are property taxes calculated in... New Zealand.
1 The local government sets their budget.
2 Then a valuing company sets property values once every 3 years based on permits and local sales.
3 Then the mill rate (property tax percentage) is set at a rate to clear the budget.
Tax rates are stable as property prices increase. The only thing that wouldn't be under your democratic control would be if your neighborhood suddenly became very desirable, changing your house price substantially while leaving other areas unchanged.
If you cannot afford the tax bill, there are programs for low-income or retired persons to get debt forgiveness.
Oslo, Norway where I live is a pretty expensive city, but we don't have property taxes so that is not an issue.
But like Vancouver we have serious issues with the housing market. We have a green area around Oslo were you can't build on (that is where everybody goes skiing and hiking).
And we have the extra problem that due to being so far north we can't build high rises otherwise we wouldn't get any sun in the city in winter time.
But they have started turning a lot of old villa areas in to 4-5 story buildings. So densification is definitely a strategy being followed in Oslo.
A Canadian who invests in single-family homes recently told me that the U.S. state of Indiana charges double real-estate taxes if the home is not owner-occupied. As a Californian who owns rental property in Arizona, I am all in favor of this, provided that means my primary residence would be taxed less.
Real-estate taxes on your primary residence is the equivalent of paying rent. It has become so high in some states (e.g. Oregon) that it discourages home ownership.
Oregon's real estate taxes are modeled after California's. They are capped at 3% increase per year (in taxable value, increases in individual levies can lead to more than a 3% increase year over year).
My house is about 10 years old and I pay ~1.5% of it's resale value in taxes annually. Granted, that's much higher than my neighbor who occupies his childhood home built in the 1960s but it's hardly outrageous compared to other parts of the country.
One difference in OR, in addition to selling a home, a significant improvement (ie adding an additional bedroom) can lead to a resetting of the taxable value at current market value.
California does give a homeowners exemption on property tax; but it's in the constitution at $7000 of value, so it's only a $70/year discount, and there's a lot of rules to follow if the legislature wants to change it, it looks like they have to also increase the renters credit, and be revenue neutral for local governments; I don't expect it's likely to be increased by legislative action.
Moreover, in most of California, the supply of housing has been artificially restricted using overly stringent zoning rules and laws. I'm in favor of reasonable zoning rules, but in my city the only justification for limiting new constructing seems to be existing homeowners who "want to live in a small town" and enrich themselves at the expense of newcomers who have little choice but to settle in the area for economic reasons.
"This is such a hard problem to solve, no one wants to force elderly people to move"
Not really, in Maryland property taxes are reduced for house holds making under 60k and are zero for people who make under 10k. There are limits on the value of the home so you can't buy a mansion and then live in it retired and tax free but it protects poor people and old people.
Most countries dont have such high property taxes that the USA does. In London I paid $2500 a year in council tax and thought that was a lot of money, even though that was about 0.25%. Meanwhile NYC suburbs I'm now paying that every two months.
My aunt and uncle used to live in Bronxville, a suburb of NYC (it's part of Eastchester, which is in turn part of Westchester... NY municipal areas are confusing). They moved out in 2003, in large part because they were paying $25k/year in property taxes and they were both retired empty-nesters.
When they told this to me and my mom, we both thought it was insane. I was born in Texas, and my mom has lived in Texas since 1979. I'm not a homeowner myself (I rent a townhouse), but my mom is, and her property taxes in Dallas are around the same as what you paid in London.
This is one of the reasons I intend to stay in Texas for the rest of my life. Northern coastal cities are just completely insane in terms of expenses. New York is a wonderful place to visit, but I'd never live there.
Meanwhile, people like me would love to be able to live in Bronxville or Scarsdale for the school systems.
It makes no sense to live there when you have no school age children since you can move a few blocks away in one of the surrounding towns and still have the quality of life.
But I am sure you paid more in income taxes in London. Which policy do you prefer? In my opinion taxing wealth is always a better idea than taxing income..
I am generally inclined to agree with your last point, however it is possibly to be wealthy but to have very little liquidity. It has been the case that folks in the US who are on a fixed income (e.g. Social Security or disability) end up losing their home simply because they can't pay their property taxes and eat at the same time. It's rare but it has happened and will continue to happen as long as property taxes remain the large source of revenue that they are for state and local governments.
Many jurisdictions have worked around this by allowing elderly homeowners to defer property taxes on their residence until they move/sell/die. It's a great concept, but can cause a liquidity issue should a large percentage of total property taxes be deferred for years or decades.
Where I live, you have to be 65+ and own 60+% equity in the home. The problem is that some old rich people are moving in, paying cash for property, and then deferring. They aren't exactly the intended beneficiaries of the scheme.
Taxing income makes it harder for first generation hard working high income earners to purchase a house, whereas real estate gets passed down from generation to generation and increasing its value along the way.. Only making rich people richer..
Then you get people paying far more in taxes just because their neighborhood became popular.
If you want to tax idle wealthy people, it's simple: tax their investments. This means a stock transaction tax, since so much wealth is tied up in stocks. You can also tax additional real estate properties (i.e. no property tax for a primary residence, but tax vacation homes, rental houses, etc.).
Prop 13 is certainly unfair policy, but is almost certainly not a causal factor.
New York is a great example of a place with runaway train property taxes and perennial housing shortages in the NYC Metro area.
Property tax escalation creates vicious cycles, vaporizing buying power and creating disincentives for property maintenance, especially in older houses and poor neighborhoods.
In those areas, government aid programs create a housing price floor, so property owners maintain the minimum requirements for habitability, run the property down to zero value, and walk away.
Actually, it's an easy problem to solve technically; the hard part is selling the solution politically.
All you have to do is, instead of capping the growth of the tax rate, you cap the growth of the required payment against the tax. If the tax is greater than the required payment in a given year, the locality gets a lien on the property for the difference; but, critically, that lien does not become due until the property is sold.
This system would let localities collect, in the steady state, as much property tax as they would have before; it's just that they wouldn't actually receive part of the tax on a given property until it was sold, so the money coming in would be a little lumpy. But that doesn't seem like a serious problem.
Anyway, the point is, if localities could still collect the amount of property tax on residential properties that they need, they would be more inclined to encourage residential construction.
It's been done in places, and it should have been done in California. Prop. 13 is destroying the state.
It would make the law more complicated, but I think the property tax should be recalculated annually based on your property value but it should also be capped to a percentage of income. You could set a floor of the existing prop-13 tax rate. And ideally only the land value is taxed, not the structure on top of it.
<Prop 13 basically keeps the property taxes constant (or 1% increase) as the value of your house increases (doubles or triples)>
No, it sets your base tax value at purchase to 1% of the purchase/FMV price, and its increases from there are annual and limited to 2% of the previous tax.
e.g. assuming a purchase price in 2015 of $1 million:
Year Tax
1: $102,000 max
2: $104,040 max
etc. (initial * (1.02 ^ year#))
<Your tax gets re-calculated only if you sell your house>
Or any other change in majority ownership. It can also be triggered by improvements.
Note that local governments heap many additional taxes in the form of "parcel taxes" that are fixed amounts -- a regressive tax effect (a $20M estate and a $300K condo pay the same amount).
In Toronto it is based on assessed value. You get a letter each year with a fairly conservative estimate of the value of your home, and your tax is a flat percentage based on the line item in the budget (city, education and transit).
Calculator: http://wx.toronto.ca/inter/fin/tax.nsf/tax?openform
In Vancouver, property tax is based on calculating the cost of the provided services, then dividing the cost over all the homes based on home price and adjusted for and a few factors such as location. Every home is assessed annually, which becomes the basis for how much tax you pay. Theoretically, if the cost of providing the services were constant and all home values increased at the same rate, your property tax would never change.
One of the reasons I had heard for some people wanting it is that some local politicians had figured out that they could manipulate housing valuations to increase their tax revenue. It's not in the list on Wikipedia and I'm not sure of the validity of it all as I'm not aware of what the practices actually are in California; but I recall reading about it back when Arnold first ran for governor.
Do you really think the housing problem in the Bay Area is the result of prop. 13?
The housing problem is multifaceted.
"Let's just get rid of prop. 13 today." Do you really think the price of realestate, or rentals will go down?
In my county, the county workers are already paid over $100k/yr. for picking up trash on our supposedly filthy trails. Our county workers are paid very well. Where I reside we have cops everywhere. You could remove 75 percent of them, and I don't think anyone would notice, except for the fees they bring in.
Howard Jarvis knew what government did with more money; they spent it on themselves.
O.k.--I'm not in the mood for this, but the housing crisis in the Bay Area is due to a lot of factors. It's a nice place to live. Your boss wants the best. I don't know why they picked the Bay Area. There's other nice places, with temperate climates? He wants only the best for himself, and his spawn. The best house. The best schools. The best car.
And by golly, he only deserves the best?
San Francisco, and Marin county are not designed to scale. San Francisco has a better shot at growth than Marin, but I leave that alone. They can go up in S.F.? But I don't think that city will ever see real subways, and not because of money.
Some Bay Area residents are NIMBY'S. Some have good reason--look at 101 at 3:30 p.m. The sewers are old, and small. The streets are narrow. It's surrounded by oceans, federal parks, etc. It's not a vast area.
Local governments almost never approve variances. Sure they take the money, but never approve. It's very difficult to build in the Bay Area. It's almost like they go out of their way to curtail growth. I would love to build a small cabin. Twenty years ago my dreams were shattered when I tried. The kind lady at the planning department, said I'll take your money for the variance, but honestly-- they never approve.
When I was a kid Howard Jarvis wrote a book, called I'm Mad as Hell. My father was a new journeyman electrician, and when my father would look at that property tax bill yearly. My father was beyond disgusted looking at those rising numbers. Every year they took money, and spent it on Themselfs. My father was a conservative Rebublican, but was all for prop. 13, along with millions of Californians. Even though I was a kid, I could feel the anger among adults. The politicians had a little game back then; raise the assessed value one year, raise the tax rate the next. There was always the same loser in this games, and it was the guy who paid the taxes.
If you honestly think the housing crisis is due to prop. 13, read ISBN: 0-8129-0858-9 I'm Mad As Hell.
By the way, I'm disgusted with the housing situation along with everyone else. I don't blame prop. 13 though. A few weeks ago I heard a lady on the radio say, "I lowered my tenants rent $500 a month." Announcer, "Why?" Moral lady, "I was having a hard time looking at myself in the mirror."
How are property taxes calculated in other places in the world? Vancouver? London? Tokyo?
This is such a hard problem to solve, no one wants to force elderly people to move because of a bull real estate market, but you also need young hard working people in your city for economic growth. My solution would be to jack up the real estate inheritance tax and allocate that money for public transportation and affordable housing.