Wednesday, November 23, 2016

Full houses

Vancouver is currently in the process of implementing an empty homes tax to try to make sure that the city uses its existing house stock more efficiently. As one of the most unaffordable cities for housing in the world, Vancouver's mayor is desperate to bring these costs under control and is prepared to try inventive policies to achieve it. Sydney is more unaffordable than Vancouver, so it's unsurprising that when Jessica Irvine asked economists and planners whether the idea would work here, she found little opposition.

In Vancouver, all property owners will need to declare whether the property is vacant, and if it is, then the owner will pay an annual tax of 1% of the property's value. The median value in Vancouver is $1million Canadian (roughly equivalent of Australian dollars), so the tax on a median dwelling would be $10,000.

A vacant dwelling is defined as a property that is not either a principal place of residence, or a property that is rented for more than 180 days in a year, in periods of at least 30 consecutive days.

Owner-occupiers and others already have to make a yearly declaration that they reside in the property in order to receive the exemption from paying land taxes, so this extra paperwork isn't much of a big deal. If an owner fails to declare their property's status, it is deemed empty, and the 1% tax applied.

There is a good incentive, then, to declare the property "not vacant". Perhaps some owners will be tempted to fib, and make the claim even if the property is vacant. To address this, the city will conduct both targeted and random checks of properties each year to assess the validity of such claims. If a declaration is found to be false, the fines can be $10,000 a day. The cost of administering the scheme, including enforcement, is budgeted at $1.5million.

Of course, there are exemptions - 8 of them. Properties may be vacant without attracting the tax if:
  • The property is undergoing major renovations, or is under construction or redevelopment (with permits).
  • The registered owner (or other occupier) is undergoing medical or supportive care.
  • The owner is deceased and grant of probate or administration is pending.
  • Ownership of the property changed during the previous year.
  • The property is subject to existing strata rental restrictions.
  • The registered owner uses the property for six months of the year for work purposes but claims principal residence elsewhere.
  • The property is under a court order prohibiting occupancy.
  • The property is limited to vehicle parking or the size, shape or inherent limitation such that a residential building cannot be constructed.
These exemptions and the nature of enforcing a scheme like this leaves open the possibility of a property owner taking steps to avoid the tax. One obvious way would be to keep properties furnished to give them that "lived in" look, and sign sham tenancy agreements with people who charge less than $10,000 a year for their trouble.

Vancouver is doing this to address something up to 20,000 possibly empty homes. They've identified around 10,000 homes as empty, and there are another 10,000 they're not so sure about. Many will get exemptions. So the possible revenue from the tax is up to $200m, and it's likely a lot less than that. But even if the city only receives this tax from 3,000 median homes that's $30m odd more than the administrative costs of the program. The process would hopefully have made the other 17,000 property owners think about what they're doing, and perhaps bring some back into the rental market.

Vancouver is quite small, half the size of Adelaide, so 20,000 homes is quite significant. Proportionally, it's about on par with the roughly 80,000 empty homes that Prosper Australia finds in Melbourne each year.

With vacancy rates for rentals across Sydney stuck below 2% for many years now and rents at all time highs something needs to change. Addressing the problem of wasted property is a good idea. It is a better supply-side solution than naively relying on developers to deliver tens of thousands of apartments all at once to create a market shock, rather than staging releases to ensure maximum prices, and having little impact as population grows to meet the new supply.

An even better idea is a broad-based land tax which encourages the productive use of all properties, not just empty ones. Land tax is very easy to collect (and hard to avoid), and is more reliable than stamp duty as a revenue source for government. But an Empty Homes Tax could be a good first step towards a fairer approach to housing taxation.

1 comment:

  1. This sounds like a sensible and reasonable idea, therefore it is unlikely to succeed (people have been known to call me cynical).
    In theory a good income could be made as a 'sham tenant', however to do it correctly could be a lot of work. you would need to make sure washing goes out and in regularly, lights go on and off, TV can be heard/seen, cars or people come and go and of course the water and electricity meters tick over at a reasonable rate. I think it would be easier to just rent the property to a 'real' tenant.
    I would imagine the water and electricity meters would be a good guide as to which properties are empty.
    It will be interesting to follow the progress of this tax, hopefully my cynical side is proven wrong.


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