A New Solution To The Housing Affordability Crisis
The Problem: Rising Real Estate Costs
UPDATE: I gave a talk about this (and some of the other blueprints) in Dallas and it is now up on YouTube
It is hardly news that cities and towns across America are in the midst of an affordable housing crisis. In New York and San Francisco, for example, housing prices have been outpacing income for years, pushing up rents and home purchasing costs across the board. In California, a recent poll found that 56% of respondents stated that they’ve considered moving in order to find more affordable housing. Within cities, young people and others with limited incomes are left scrambling for places to live, often settling for cramped and occasionally dangerous living situations. Overcrowded and hazardous living conditions famously contributed to a 2016 fire at the Ghostship Warehouse in Oakland, California, which claimed the lives of 36 people.
How house flippers and speculators have driven up prices:
But rising prices are not just caused by natural inflation. Real estate speculators and house flippers have played an important role in creating the affordability crisis. Speculators are people or companies who typically buy up large numbers of housing units on the market, just so they can make a profit.
House flippers buy housing units at low prices, fix them up and then sell them at dramatically marked up price. Flippers proliferated rapidly during the first decade of the 21st century, cementing their place in pop culture through a series of reality tv shows. However, house flipping and other kinds of speculation can have damaging consequences for whole neighborhoods. By reducing the supply of available housing units for middle and low income residents, flippers and speculators can artificially drive up market demand, leading to inflated housing prices. In turn, rental companies and other rent-seekers will often raise rents in order to capitalize on the increasing trendiness of these neighborhoods, setting the stage for more flippers to come to the area and creating a vicious cycle.
The dangers of unchecked profit seeking in the housing market extend beyond high prices for buyers. New and mounting evidence suggests that financial speculation played an unappreciated, yet critical role in the 2008 subprime mortgage crisis. A study by the National Bureau for Economic Research found that in the years leading up to the financial crisis, middle and high income borrowers accounted for most of the increase in mortgage debt. According to economists, many of these borrowers saw the rising home market as a good investment option and took out multiple mortgages in order to flip properties or to obtain rental properties. When the crisis hit, those same borrowers were also more likely to default on that debt, as these were not their primary residences.
For almost a century, New York and other major cities have been relying on rent control laws to keep prices down. Unfortunately, this strategy has had limited success: costs have continued to creep upwards, putting real estate out of reach for more and more people. Furthermore, economists from across the spectrum are increasingly in agreement that in practice, rent controls actually drive up prices by reducing the housing supply.
Rent control will not work for one simple reason: It doesn’t scale.
The process of rent control is a very manual process involving many different steps just to certify one property unit. A new perspective is needed.
We need a new, more ambitious solution that creates organic resistance around the entire system in order to support low and middle income buyers and renters and to discourage market speculation. In response to this problem, I’ve developed a proposed set of changes to the property tax code. Taken together, these changes would go a long way towards helping to achieve a more affordable and equitable housing market for everyone.
The Solution: A Multi-Level Graduated Property Tax Code
Low property rates for individual property buyers
First, incentives for low and middle income single property homebuyers can be built into the tax code through the creation of a “primary resident” category, which offers the lowest possible property tax rate for those who have purchased a single property and wish to be a part of the community.
A “primary resident” is someone who:
- Has residency in the city or locality,
- Pays city income tax and payroll taxes on at least 80% of their global income,
- Pays state income tax and payroll taxes on at least 90% of their global income, and
- Pays federal income tax and payroll taxes on at least 95% of their global income
These conditions are purposefully designed to be generous; in San Francisco, the bottom 95% of residents would meet them.
Residents in this category have not only bought a property, but they plan on actually remaining in their homes and contributing to their communities. These are the people who make up the social and civic fabric of their cities, and cities in turn have a duty to support them above speculators or foreign investors. The rate that would be offered to primary residents would necessarily differ by city, depending on what is financially feasible for a given location. However, any budget problems would be at least partially made up for through a series of extra taxes on people who choose to purchase additional properties on top of their first.
Four tax layers to combat profit-seeking in the housing market
These four levels of taxes have been designed specifically to combat speculation and profit seeking in the market in order to prevent home prices from becoming artificially inflated. Therefore, they would be on top of any property tax rate that a person may already be paying for a first residence. Each tax is also graduated, so that large companies who own many properties, or individuals who are engaging in rampant speculation, will incur a higher tax rate than someone who is selling their house at just slightly over the expected value.
Layer 1 —higher property tax rate for foreign investors
The first layer of taxes is a high property tax rate, reserved for foreign investors and speculators who do not pay state or federal income taxes in the United States. Because these are people who do not live in or actively contribute to the community, they will be taxed at the highest levels as compared to other types of property owners.
**Table A shows rates for San Francisco and New York City, where market pressure is highest. Tax rates are correspondingly steeper than in cities such as Dallas (Table B).
Table A: Example Table for SF or NYC
Table B: Example Table for Dallas, Austin, Seattle, etc
Layer 2 — additional tax for domestic speculators.
This layer is a property tax reserved for domestic speculators who pay state and local taxes. The tax would function similarly to the property tax for foreign speculators, but at a slightly lower rate, since these are individuals who already contribute with their tax dollars. As with the first layer, the tax would increase for every additional home. (See Tables C and D for example layer 2 rates in different cities.)
Table C: Example Table for SF and NYC
Table D: Example Table for Seattle, Dallas, Austin, etc
Layer 3 — The ‘House flipper’ tax: for houses which gain in value
Layer 3 is a property sales tax that is specifically designed to combat the effect of house flippers on the market. When a home is purchased, it gains in value, or “appreciates” over time, usually at a rate that is about equal to inflation plus 1–2%. However, house flippers typically sell homes at a price far above the normal appreciation rate, in some cases exceeding 200%. Therefore, this tax is calculated based on how many points above the normal appreciation value (plus any renovations) the home has been sold for plus bonus points based on how long the seller has lived in that residence. The bonus points are calculated with the following formula: Number of Years at Residence x 2 points. The tax will also be for buyers and sellers, in order to strongly discourage these types of sales. The tax will be calculated on the difference above the allowed amount. (Table E)
Table E *Note: for every point above 7, tax rates will equal appreciation points, i.e: 11 points of appreciation will be taxed at 11%, 12 points at 12%, etc.
See this article for example applications of this tax.
Layer 4 — The property value tax.
Finally, Layer 4 is a progressive property tax rates based on the value of the property. The tax will assessed only on homes that have a value that is three times greater than the median home price, so it will not affect many home owners. However, it will help to provide an additional market resistance in cities with particularly acute affordability crises. In addition, this tax could potentially be attractive to cities as an avenue to compensate for any loss in city funding due to reduced property taxes for primary residents. (Table F)
Table F — for homes 3x the value of median home price
Let’s structure tax to benefit communities
People certainly have a right to invest in the housing market and this solution does discourage that. However, cities also have the right to structure their tax codes in order to encourage the kinds of people who are more likely to remain in the city and contribute to their communities. Cities likewise have the right to discourage speculators, flippers, and others who are only interested in making a profit from coming in and overwhelming their housing markets.
The adjustments to the tax code that I’ve proposed in this article can be easily customized to meet the specific needs of individual cities and regions. For cities in which the housing crisis is not so severe, they may only need the first two layers of taxes to discourage rampant speculation. However, in New York and San Francisco, or in other cities that are facing acute housing crises, layers three and four can help bolster resistance in the housing market, making runaway real estate prices less of a problem.
Taken together, all of the taxes offer a flexible and elegant solution to a pervasive social problem.
