The World Economic Forum just released a paper titled, “How do property tax rises affect consumer spending?“. The paper looks at the impact that a rise in property taxes has on consumer spending. It used a recent change in Italian property tax policy to study the effect. The finding that really got my attention was this:
“Our analysis reveals that the taxes paid on the main dwelling triggered a large and very significant decline in household expenditure whereas the taxes paid on other residential properties caused a small and statistically insignificant change.”
It reminded me of what is going on in Britain, where thousands of properties held by foreign buyers sit unoccupied. One investigation done by The Guardian estimated that more than $350million worth of properties sit vacant on one of Britain’s most expensive streets.
While the findings are interesting from the intended perspective of understanding how consumption changes with property taxes, it adds some useful information to address another important issue – dealing with owners of vacant properties. As the situation in Britain shows, there are some public policy issues related to properties that are being used as parking spots for capital instead of their intended use.
The findings from the paper provide some ammo to the argument that owners of vacant properties should be subject to higher taxes (and perhaps increasingly higher as vacancy continues) than those folks that actually use the property. I agree with this idea as well, because any policy that makes it easier for someone to become vested in the community, in this case through home ownership, is far better than one that unintentionally creates a transient or absentee owner environment.
Allowing homes to be used as parking spots for excess capital can have negative effects on the community. For example:
- Local residents are forced to compete with foreign buyers for homes that ultimately drive prices beyond what can be considered affordable.
- Local small businesses that rely on the community for sales are directly affected by each additional home that remains unoccupied.
- Elevated property values that are the result of exogenous factors, independent of local market conditions, exacerbate the income inequality issues and pull at the threads of social cohesion.
I believe in free markets and I believe that anyone with excess capital should have the right to park it mostly anywhere they want – with the obvious exception of illegal or unscrupulous activities. But I also believe that the government has a responsibility in making sure that policies reconcile intent with reality. If I were a policymaker, I would consider the following ideas to address the issue of absentee property owners:
- First and foremost, the market should be allowed to decide what the price of a property is. No government mandate or policy should be involved in price determination.
- Property owners that use the property for its intended (zoning) use should receive some kind of preferential tax treatment. So basically, regardless if you are a local or foreign purchaser, if you buy a home and actually live in it, then you should be given preferential tax treatment.
- Property owners that use the property on a limited basis (vacation or seasonal use) should be required to pay a slightly higher amount, to offset the negative effect of a property being used at less than its maximum potential.
- Property owners that are de facto absentee owners, should be subject to higher property taxes that increase over time; thereby creating a less attractive investment opportunity at the outset as well as imposing a cost over time that disincentivizes long-term absentee ownership.
The local government has a responsibility to its constituency to support and strong a vibrant community. Property tax policies should reflect that goal by incentivizing use.