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Reduce Speculation and Limit Gentrification: Penalize Absentee/Pied-à-Terre Owners

Posted by Shane Phillips on Friday, June 20th, 2014

The cities where housing prices are highest and the gentrification debate is the most forceful — places like San Francisco, New York, Vancouver BC, and London — all share one quality: they’re world cities. There are a number of ways to define what makes a city “world class,” but the salient attribute here is that each of these cities is the target of significant foreign investment, particularly in the housing sector. Wealthy investors, foreign and American alike, park their money in these cities and crowd out less affluent families that would otherwise choose to live in these cities, if only they could afford to.

While cities like Chicago, Austin, and Seattle can typically stave off drastic price increases by just building enough housing to meet demand, that’s not always possible for world cities because demand isn’t just local, or even national — it’s global, and in an era of growing inequality the demand for luxury investment properties and pieds-à-terre is vast. That demand is an obstacle to providing an adequate supply of affordable, middle-class housing, but it needn’t be. If harnessed appropriately, it could even be a strength.

The 1004-foot, 90-story One57 Tower in Midtown Manhattan 
is home to just 155 residential units. Photo from New York YIMBY.

By charging the wealthy owners of these seldom-inhabited homes a more aggressive property tax, we can discourage this kind of investment on the margins and collect more revenue for cities to support their essential services and affordable housing goals. Besides discouraging speculative investment on the part of potential owners, it would limit the incentive for developers to produce massive-yet-low-density towers that provide little additional housing in the most desirable neighborhoods.

Background

Right now there are two problems in world city housing markets. The first is that there’s just not enough housing to meet demand, usually even just the demand of local and regional residents. That results in consistently low vacancy rates, which in turn leads inexorably to higher prices as a large supply of would-be residents compete over a small supply of available housing.

The second problem is that not all of the homes in these cities are even occupied. Wealthy foreign investors view these markets as safe, and often even lucrative, places to park their cash, and they have the added advantage of making great vacation spots for a few weeks out of the year; plenty of rich Americans do the same thing, owning homes in cities across the country that are generally only inhabited for a small portion of each year. This quote from a 2011 New York Times article sums up the problem:

In a large swath of the East Side bounded by Fifth and Park Avenues and East 49th and 70th Streets, about 30 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, according to the Census Bureau’s latest American Community Survey.

In one part of that stretch, between East 53rd and 59th Streets, more than half of the 500 apartments are occupied for two months or less. That is a higher proportion than in resort and second-home communities like Aspen, Colo.; Palm Beach, Fla.; Virginia Beach; and Litchfield, Conn.

Not only does this leave many neighborhoods barren of any night-time and weekend activity, it takes housing off of the market for actual potential residents. Every unit that goes unoccupied is taking up space that could go to a family that would jump at the chance to live in a place of such opportunity and vitality. Those 5,000 vacant apartments in New York’s east side could house 5,000 somewhat less affluent (though still undoubtedly wealthy) families, those families’ current units could then be occupied by a slightly lower-income demographic, and so on all the way down the line.

The problem is that in many of these cities, the property taxes paid by the wealthy owners of these homes aren’t nearly punitive enough to discourage absenteeism. If you pay 2 percent of your home’s value on property taxes but your home’s value grows by 5-10 percent or more each year, you’re still coming out ahead. With the added status and convenience that comes with an extra home in London, New York, Los Angeles, or wherever else, the appeal of buying is obvious, even if you almost never use it. When people choose to invest more of their money in stocks, stocks go up and everyone wins. When people choose to invest more of their money in homes, prices go up and everyone that doesn’t already own property loses.

The Fix

The way to fix this is to change the calculus so that owning a second home in these cities is no longer a profitable investment, or at least considerably less profitable than alternative investments. That can be done in a number of ways. It doesn’t really matter how you choose to do it, as long as it works. An important side effect will be that as demand among the super-wealthy decreases, the upward pressure on housing prices will subside to some degree. And, bonus!, your city gets more tax revenue.

The simplest way to discourage speculative investment is to raise the tax rate on uninhabited properties. That might mean increasing property taxes to 3, 5, or 10 percent (or more) — that’s best determined by the guys in finance. It’ll depend on whether your city wants to discourage all speculative/vacation property investment, or if it’s content with leaving these properties vacant if it means raising a lot of extra revenue for the city. There’s also some wiggle room in determining what the threshold is for being subject to these rates. Should you be exempt if you live in the home at least three months out of the year? Five? Six? Again, the specifics will depend on the exact goals that the locality is trying to achieve.

If tax rates are capped as they are in many states this might require a bigger push, advocacy-wise, to create legislation that can make this happen. That said, it’s hard to see a populist policy like this, one that punishes wealthy investors for wasting space in our most productive and desirable cities, as anything but a winner. Alternatives in lieu of a property tax might include explicit fines/fees. Another option would be to charge these owners for the income tax they earn outside the state, but at least in the case of New York state, that was just ruled unconstitutional.

About Shane Phillips
www.betterinstitutions.com
“I grew up in the suburbs of Seattle, got my driver’s license the day I turned 16, and rarely visited the city because driving in it was so unpleasant. Seven years later I moved to Seattle and realized the problem wasn’t the city, but how I chose to get around in it. I’m currently pursuing my Masters in Public Administration and Urban Planning at the University of Southern California in Los Angeles, and working on behalf of more sustainable, safe, healthy, economically productive cities.”

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