(Joint with Nathan Lauster and cross-posted at HomeFreeSociology)
Property Tax Snacks
Residential Property Taxes have been rising in Vancouver. As always, we’re seeing a lot of sturm and drang about the rise. But we think it’s ultimately a good thing. Why? Here’s three perspectives. From a fiscal perspective, property taxes pool our resources to enable our government to pursue projects and provide for the common good. They’re a big component of how we take care of each other and set priorities. From a social equity perspective, property taxes are directed at wealth, which is highly unequal in its distribution. Property taxes are also - at least around here - mostly a tax on land value, the rise in which is socially produced and largely unearned by any landowner. We should definitely be looking to redirect the massive gains in real estate wealth in this province toward the common good (Henry George for the win!) Finally, from a financial perspective, higher property taxes increase the carrying cost of treating housing like any other investment. They also work to stabilize the market to the extent they counterbalance the weight of shifts in interest rates. In this sense, property taxes and prices are endogenous.
Also worth noting: Vancouver’s property taxes are very, very low. Measured as the “mill rate” - or the rate of taxes owing per $1,000 in property value - the City of Vancouver’s rate is far below most other municipalities in BC (and further afield), especially outside the Lower Mainland.
Within municipalities, property taxes hit real estate wealth, but they’re basically “flat taxes”, set at the same proportion to property values regardless of underlying disparities. What’s more, looking across municipalities, there’s a perverse regressivity to property taxes. The wealthy people (e.g. living in Vancouver or West Vancouver) pay lower tax rates on their properties than those generally less well-off (e.g. living in Nanaimo, Port Alberni, or Prince Rupert). Measures like the School Tax, progressively applied to properties over $3 million, only partially counteracts this underlying regressivity at the Provincial scale. Still, we should be looking at more ways to bend property taxes in a progressive direction, and perhaps even use them to provide relief for income taxes. In short, we can definitely make property taxes a better tool for promoting a more fair BC.
The comparison between places like Vancouver and places like Prince Rupert also helps demonstrate the endogeneity of property taxes and prices. Someone owning a $1M property in both municipalities pays different tax rates. The present value of that tax break the property in Vancouver gets above the property in Prince Rupert, assuming the spread stays constant, is $229k. That serves to inflate property values in Vancouver. Which in turn serves to depress the mill rate in Vancouver. Rinse and repeat.
Let’s briefly touch on property taxes in terms of fairness between the City’s renters and property owners. The city has been working on making itself more fair to renters, who make up the majority of its population but find their options for remaining in the city increasingly constrained. Here we want to provide a simple comparison of property owners to renters in terms of rising costs they face. What’s risen faster, rents or taxes? We also don’t want to forget about rising asset prices too! After all, most property owners have reaped enormous gains in wealth that haven’t been available to renters. Here we’ll set aside other benefits available only to owners (including homeowner grants reducing property taxes, the complete absence of capital gains taxation on sales of principal residence, and even the lack of taxation on the imputed rents home owners pay to themselves) and just look at the rise in property taxes paid and gains in property values relative to median rents over the last few years. What’s that look like?
Here we’ve drawn upon a representative sample of detached property and apartment condo and used their actual property taxes paid for the property tax data, and used repeat-sales HPI for single family and apartment condo within the boundaries of the City of Vancouver. The rise in property taxes paid by owners of detached properties slightly exceeds, but otherwise more or less matches the rise in median rents over recent years. The property taxes paid by apartment condo owners has had a more complicated journey, ultimately remaining below the rise in median rents (and remember, many of those condos are being rented out!) Overall, property taxes and rents have pretty much kept pace with one another. Property values, on the other hand, are through the roof! Up until very recently, we saw especially strong rise in the value of detached houses. Rapid price appreciation in the detached market (2010-2016) pushed property tax growth higher for detached houses than for condos, who are only recently catching up. The expansion in municipal budgets has driven recent property tax growth, but it remains in line with the increase in rents being paid by representative residents of the City.
Given our low vacancy rates, there is little doubt that rents would’ve risen much quicker without provincial rent control. But regardless, rents have still kept pace with rising property taxes. We still have lots of room to raise our property taxes on all of the grounds mentioned above. We could also use more progressivity in our property tax rates, working to counteract their regressive tendencies. Unlike for renters and rising rents, the research indicates that property tax increases seldom result in displacement of home owners. That said, if property owners feel their budgets squeezed too tight, the province also provides a wealth of opportunities for deferring payments. That’s yet another benefit that’s just not available to renters. But if the province wants to start supporting tenants who need a break to catch up on their rent payments, it might help put a big dent in the sky-high proportion of BC’s residents who feel forced to move.
As usual, the code for this post is available on GitHub for anyone to reproduce or adapt for their own purposes.