Tuesday, December 13, 2016

The Vacant Homes Tax. Why it's the wrong approach.

While I should be doing other things, I can't help but record some recent conversations I have had on Twitter and with Vancouver media regarding the city's recently imposed Vacant Homes Tax.

Do taxation policies lead to affordable housing?
In my April 2016 SFU lecture on 12 more affordable housing ideas, I discussed the effectiveness of taxing our way to affordable housing. While I acknowledged a Foreign Buyers' Tax might be warranted, I questioned the value of a Vacant Homes Tax. In UK it was tried, with little success. (There it was often known as the tables and chairs tax, since whenever someone was advised they had to pay, they brought in tables and chairs and claimed the unit was occupied.)

I questioned whether the administrative costs and challenges justified the effort. I also had serious concerns with the legitimacy and propriety of requiring someone to rent their property if they didn't want to.

The email from Florida
Two weeks ago I received an email from the Floridian who purchased an apartment I once owned at Bayshore. For the past 15 years, he and his wife have spent 4 to 5 months in Vancouver during the summer. He had just learned about the Vacant Homes Tax and wanted to know if our government was nuts.

"Do they really expect me to rent it out when I'm not here, or pay the tax?" he asked, adding that the tax would be about $40,000 a year.

He went on to say that he had once tried renting it for six months while not in Vancouver. However, at $15,000 a month, which is what he would want to justify someone living in his private waterfront home, there were no takers.

Moreover, it wasn't clear whether he would be allowed to rent it for a short period, according to the strata bylaws, which imposed restrictions on the number of permitted rentals and length of tenancies.

When I tweeted out his predicament, I was immediately approached by TV and radio journalists who wanted to speak with him. After all, here was a real live person affected by the tax.

Conversations on Twitter
What was more interesting were the other comments on Twitter. Many seriously questioned why he should be unwilling to pay the tax if he could afford a $4M second home. Others repeatedly pointed out the injustice of him having two homes when they didn't have one.

To my mind, this is the essence of the justification behind the imposition of the tax. It just doesn't seem right that some people keep homes empty for whatever reason, when there is a shortage of rental housing.

So tell me, what is communism?
It reminds me of the joke about communism.

"What is communism?" a young man once asked his friend.

"Well" he responded, "if I had two houses and you didn't have one, I'd give you one of mine. Or if I had two cars and you didn't have a car, I'd give you one of mine."

"Oh" his friend replied. "So if you had two shirts and I didn't have a shirt you'd give me a shirt?"

"Not exactly" his friend replied. "Because I have two shirts."

The Floridian's perspective
In my friend's case, he thought this tax was both unfair and unwelcoming. He had been coming to Vancouver for many years and imposed few demands on municipal services. Although he was here for only a few months, he was paying annual property taxes to the city and spending money in restaurants and on other activities. The city should be happy to have him here; not penalize him.

I suggested to him that given Bayshore's condo restrictions, surely he wouldn't have to pay the tax. But when he reviewed the matter with city officials, he was told that since there was not a complete prohibition on rentals, the tax would apply unless the unit was rented out.

An unexpected but intriguing legal solution?
This is where it gets interesting. When I posted his predicament on Twitter, one clever soul, understanding why he might not want to rent his home out, asked why he didn't rent it to someone on the understanding they would keep it vacant! 

That way he would be complying with the requirement to rent it, and city lawyers would have to determine if they could go after the tenant who was keeping the property vacant.

So I put this out on Twitter. "Attention all lawyers. If someone rents a 'vacant home' to someone who keeps it vacant, does the tax penalty still apply?"

I subsequently learned my tweet was shared in at least one downtown law firm where the matter was discussed. The consensus seemed to be that the city would have a hard time prosecuting the owner provided there was a lease in place.

More importantly, many other lawyers questioned the legality of this vacant home tax in its entirety, and expected it to be challenged in court.

The city's underlying intentions
I understand the city's underlying intentions. For many on Council, especially those councillors who are renters and truly care about the plight of other renters, it seems fundamentally wrong that there are people in our city who can afford to keep properties empty when there is such a shortage of rental housing.

They naively believe that imposing this tax will somehow bring thousands of units to the market, thus increasing the vacancy rate and making housing more affordable.

Alternatively, the tax will generate millions of dollars for a housing affordability fund.

What these politicians are missing is that based on experiences elsewhere, the administrative challenges and costs of this program will be significant.

Moreover, the tax will encourage residents to snitch on other residents, play all kinds of games to evade the tax, and result in other unintended consequences.

This will happen since for many property owners, myself included, the tax goes against our basic attitudes and values about owning property.

In the final analysis, I suspect there will be some properties that are rented, and others sold to someone who will own and occupy the unit. Moreover, in the eyes of those looking for rental properties, the city will be seen to be doing something to help alleviate the housing crisis. It may even send out press releases saying the program is working.

But in reality it will be a costly and futile exercise.

What the city should be doing: better address AirBNB
I suspect addressing the loss of rental stock to those operating AirBNBs is probably a better approach to generating revenue or increasing rental stock than trying to get my friend to rent out his $4M waterfront home.

What the city should be doing: Improve its zoning and approval processes
Instead of setting up this tax, what the city should be doing is revamping its zoning and development/building approval process. Daily I hear complaints from architects and builders about just how difficult it now is to get approvals in the city.

They point out that the current city administration is like an octopus with its head cut off.  The oftentimes conflicting demands of planners, engineers, building inspectors, and those in the heritage, tree management and sustainability departments, are making it too difficult to get projects approved and built.

If city officials don't believe this, just survey Vancouver's architects, developers and builders.

In the meanwhile, please rethink the application of this vacant homes tax, because as many have noted on Twitter, it will do little to improve housing affordability, but will be a costly exercise for the city.

No comments: