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Joshua Gottlieb, assistant professor, University of British Columbia’s Vancouver School of Economics.
Joshua Gottlieb, assistant professor, University of British Columbia’s Vancouver School of Economics.

joshua gottlieb

A better way to tax vacant Vancouver homes Add to ...

Joshua Gottlieb is an assistant professor in the University of British Columbia’s Vancouver School of Economics.

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The British Columbia government returns to the legislature this week to address Metro Vancouver’s skyrocketing real estate prices. The governments of Vancouver and B.C. plan to improve affordability by identifying foreigners and taxing vacant properties – but these initiatives are aimed at the wrong targets. Luckily, there is a better plan available and its lessons apply beyond the Lower Mainland.

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The unaffordable housing market in Vancouver has emerged from a multitude of conflicting policies combined with vibrant demand. The B.C. Ministry of Finance has focused its data collection on foreign buyers presumably looking for a safe asset in which to invest.

For these investors, one attractive option is real estate in safe places, such as Toronto, Vancouver, New York and Miami. If investors demanding $10-billion worth of real estate showed up in the outskirts of Edmonton, it wouldn’t be a problem. Alberta is big. Edmonton could easily build 10,000 million-dollar houses to accommodate this demand.

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But when this money shows up in San Francisco or Vancouver, it generates a perverse interaction with local housing restrictions. Municipal policies drastically limit new construction, so the out-of-town demand shows up in rising prices for limited real estate. Low interest rates further support this price growth.

As a result, prices in Vancouver have soared far beyond what income growth would justify. High housing costs, and income taxes as high as 48 per cent, put an enormous financial strain on the workers and families who actually live in these cities.

Vancouver proposes to improve affordability by directly taxing vacant homes. But administering this tax requires reliable self-reports or new intrusive bureaucracies. In addition to being complex and intrusive, the vacancy tax misses the true economic discrepancy: the disconnect between the rewards to working and the costs of living in Vancouver.

Instead, my colleagues and I have designed a sensible approach to address the affordability problem.

Here’s how it works: The city would introduce a property tax surcharge, but owners could credit their income taxes against this surcharge. Only those who don’t already pay income taxes in Canada – those who leave properties vacant or don’t declare their income – would end up paying the surcharge.

Crucially, this policy is budget-neutral and does not raise taxes. The funds from the surcharge would be immediately distributed to all local taxpayers. This plan keeps the funds from disappearing into the black hole of politically favoured causes. Instead, they would directly alleviate the tax burden of residents.

Our plan builds on the basic lessons of economic theory. Income taxes discourage work, and corporate taxes discourage investment.

In contrast, property taxes – especially when rebated to income tax payers – don’t generate this type of distortion. Land may be limited, but it isn’t going anywhere. Building on that land is constrained by artificial supply restraints, not by lack of demand. So a modest property tax increase won’t reduce real estate investment. Instead, it reduces vacancies. And it does so by changing incentives – not by violating privacy.

Beyond the income tax credit – which on its own would exempt most properties from the surcharge – we recommend an exemption for properties occupied by genuine rentals, which can be verified through tax returns. Renting is just as legitimate as home ownership, and this exemption supports the rental market by encouraging property owners to rent out currently vacant units.

Since owners have every incentive to report these exemptions, the administration costs are minimal. All of the necessary information is already available in tax returns. Unlike the vacancy tax, our exemptions are easy to understand, easy to administer, and easy to verify.

Our plan would help taxpayers in three ways. First, because of the credit they have available, those who are already working will face a cost advantage in the property market relative to non-exempt investors. Second, it encourages owners to rent out vacant properties. Third, taxpayers receive a refund that reduces their average income tax rate.

Vancouver is unaffordable because of the disconnect between local incomes and local house prices – not the nationality of the buyers. Policy makers should focus on the economically relevant part of the problem, and we have a way to do it without asking people to snoop on their neighbours.

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