by taxing / fining people for having a second home.
I don't see the issue with this? The profits in Canadian real estate are not on the back of some new found resource. It's entirely an effective wealth redistribution from have-nots to haves.
If you have property, the vast amount of value in it is strictly from the fact that it is artificially scarce. To get into the "haves" you have to pay an artificial tax in the form of a grossly inflated price.
Consider the incentives the government has created here.
You can't build new housing, or it's extremely expensive because it's limited to specific lots and then you have to buy out whatever happens to be there even if they don't want to sell, and destroy a 5 story building in order to build a 10 story building, doubling costs while halving the increase in housing. Housing is thereby expensive.
So you tax people who own housing. Well, that doesn't lower rents, because there are still the same number of people who need somewhere to live but now fewer people to invest in new construction because it's less profitable with more of the money going to taxes, so that lowers supply even more and rents increase to cover the new taxes.
This an undersupply problem. You don't fix it by taxing suppliers.
Every time I go looking for statistics to back this argument, I come away underwhelmed. In most cases I see little change in the ratio of dwellings to households over the past few decades.
Take a look at the first figure (HM1.1.1) in the following document - particularly those for the US, Canada, Australia, and NZ (all countries with prominent housing issues).
On the other hand, I think there is a strong argument to be made for increasing underutilisation of housing (more second homes, short term rentals, etc).
Take a look at the first figure (HM1.1.1) in the following document - particularly those for the US, Canada, Australia, and NZ (all countries with prominent housing issues).
These are country-wide numbers. The obvious problem is that there is existing housing in Detroit but demand for housing in San Francisco.
It's also somewhat self-defining. If millennials are forced to live with their parents because they can't afford their own home then this is counted as one "household" when there is demand for two.
On the other hand, I think there is a strong argument to be made for increasing underutilisation of housing (more second homes, short term rentals, etc).
There isn't anything inherently wrong with short-term rentals or second homes, they're just another type of housing demand that requires supply to increase to compensate. Until it isn't allowed to.
I'm talking about the size of the building. An actual apartment complex. I'm not even sure renting homes in general is a good idea. Let the market figure it out for someone who wants/can afford to own it.
I'm not even sure renting homes in general is a good idea.
Let's review the situation here. 1) The large majority of the land in the area is zoned exclusively for single-family homes. 2) Some people don't have the money to buy, e.g. no down payment or bad credit.
That doesn't follow at all. If you reduce investment then you reduce production. The price only goes down if the cost of creating more of them goes down, unless you can remove so much of the demand that you no longer need to add more supply. The small percentage of single-family homes owned by corporations isn't that.
Nah. There's 30 homes and 30 people. 10 people own two homes apiece that they live in 50% of the time. That leaves 10 homes for the other 20 people to fight over, driving the price up. Pretty simple.
Your assumption here is that the number of homes is fixed and that there are otherwise enough for everybody.
Only ~5% of homes are second homes, not 33% as in your example.
Now suppose there are 25 homes and 30 families, better reflecting current reality. If you can't make more you're screwed. But you can create new housing. Zoning makes this expensive, because zoning requires it to be done in an expensive way. You have to destroy a large building to build an even larger one because multi-unit buildings aren't allowed where there are currently single-family homes. But you can do it. It just costs $600,000/unit as a result.
Since there are more families than existing homes, everybody bids up the price of housing units because they don't want to be homeless. When the prices hit $600,000/unit, construction companies build more units because now it's finally profitable. Then all the units stay that expensive because there are only just enough -- or not enough, but the remaining people don't have $600,000. But they don't go higher than that because that's the price at which more can be created under existing zoning rules.
If Richie Rich comes along and buys two second homes, that doesn't raise the long-term price, because the price is right at the threshold of profitability for new construction. So two new units get built at that price and the market price stays where it is -- at the cost of creating more units. If you want units to cost less, that cost has to go down, because units can't be added for less than that and eliminating 100% of second homes is not enough of a reduction in demand to shift from that being the price-setting factor.
Whereas if you could build new units for $200,000 then Richie Rich could buy a hundred of them and they'd still cost $200,000 because construction companies would just build a hundred more.
I'm pretty sure you lose a lot of tax advantages on rental properties (mortgage interest deduction, depreciation etc.) if you don't rent them at market rate.
If they rent it for a nominal amount, they're effectively losing money on the property and gambling on appreciation. If someone wants to do that, good luck to them.
You can't deduct depreciation on an owner-occupied house to begin with. The premise is that you're trying to distinguish between landlords and people who have a second home for themselves. But they can just rent it to a friend who in turn lets them use it.
If they're buying multiple homes to rent out at market rates to the general public then they're just an ordinary landlord -- the thing that wouldn't be paying a tax on "second homes" by design.
I thought the tax on "second homes" was a tax on landlording and speculation, not a tax on vacation homes. I think we might just be talking past each other here.
Why would taxing landlords reduce housing costs? It just increases housing costs for landlords, and in turn renters, as landlords become unwilling to pay for new construction until rents increase to cover the tax.
If landlords become unwilling to pay for new construction, that reduces the demand for new housing supply hitting the market. Which reduces its price and makes it more affordable to owner-occupants.
I don't know if it definitely works. But it's plausible. Tax what you want less of, right?
If landlords become unwilling to pay for new construction, that reduces the demand for new housing supply hitting the market. Which reduces its price and makes it more affordable to owner-occupants.
Construction occurs until the point that it stops being profitable, which is a price point more than a number of units. Zoning rules make it so you have to buy a 5-story building, then knock it down and pay the cost to build a 10-story building in order to add 5-stories worth of units. That's much more expensive than putting a 5-story building where there is currently a single-family home or an empty lot, which is prohibited. So if landlords stop being willing to pay for that, it doesn't cost less, it just happens less, because at any lower price the construction doesn't happen.
Which is how rents increase. Suppose 100 new units would have been built and landlords would have bought half. They stop buying, so construction companies only build 50 new units because there are only 50 buyers at a profitable price. Then demand for rental properties increases over time but supply of rental units doesn't, so rents go up. Then the landlords start commissioning new units again, because rents have increased enough to make it profitable again, but only for as long as they stay that high. The price of the building stays the same -- it's set by the construction cost -- but the rents go up because the landlord has to recover the cost of the building and the tax, or they're not commissioning a new building.
Tax what you want less of, right?
The trouble is you don't really want fewer rental units, unless you like high rents. What you want is maybe more owner-occupied units, but this is only a trade off when supply is artificially constrained -- otherwise you can build more of both, which is obviously better.
Whereas building fewer rental units without building any more owner-occupied units is quite useless.
No, no, the government interjecting themselves into housing and creating an artificial scarcity, to aid their favoured voters at the time, is the problem. The idea that the solution to this is not to have the government step back but to have them become even more involved by redistributing this wealth distortion to their new favoured voters is a further level of madness.
This is my point above 100%. The government has been the sole source of these problems and now is desperate to solve them, steamrolling people without compensation.
The same, in my opinion, with inflation. Inflation has been caused by government monetary policy being too loose for three decades and effectively neutering its anti-competition authorities, but now they are getting tough on grocers as if the grocers are both the sole cause of the problem (false!) and that they made the problem in a vacuum (false!).
I have historically been extremely liberal, voting Liberal or NDP (even more liberal than the Liberals for those outside Canada) my whole life. The last few years of seeing our Liberal government fumble the ball so badly and point at everyone but the government itself (left and right governments of the current and past!) has made me realize the truth of the Reagan quote “government isn’t the solution to your problems, it is the source of your problems”.
Hayek’s Nobel speech on the pretence of knowledge is as accurate as ever.
The grossly inflated price comes from where though? I'd put it to you that a ban on usury where real estate was concerned would crush land values over night. Easy money (cheap loans) allow speculation, and speculation is one of the primary drivers of land value.
A far bigger driver of speculation is scarcity. Without that scarcity, loans would do nothing to drive land value.
Tight zoning is the primary driver of real estate value, because it further increases the scarcity of land. It makes small homes worth absolutely insane values.
Further, though eliminating cheap loans will limit the amount that people can pay for the real estate, it also reduces the ability of people to pay, so every person is back to the same place with scarcity. So though eliminating loans may change the face value of the cost of housing, in real terms, eliminating loans does nothing for ordinary's people ability to obtain housing where they want it. Only increasing supply by removing overly restrictive zoning will actually improve the material conditions for people.
All that said, we should definitely eliminate financial products in the US like the 30 year fixed rate mortgage, a government creation that does inflate prices, while reducing the ability of people to move. But we should get rid of it primarily because it reduces the ability of people to move by trapping them into the home they were in when mortgage rates were low.
What you call usury is also a government caused problem. It’s almost like 30+ year amortizations and ultra low interest rates… weren’t good for affordability. But now everyone but the government itself is the cause of this issue (in the government’s humble opinion). Blame immigrants, developers, AirBNB, investors… anyone but government! And if you must blame government, blame some other level of government!
Comments
I don't see the issue with this? The profits in Canadian real estate are not on the back of some new found resource. It's entirely an effective wealth redistribution from have-nots to haves.
If you have property, the vast amount of value in it is strictly from the fact that it is artificially scarce. To get into the "haves" you have to pay an artificial tax in the form of a grossly inflated price.
Consider the incentives the government has created here.
You can't build new housing, or it's extremely expensive because it's limited to specific lots and then you have to buy out whatever happens to be there even if they don't want to sell, and destroy a 5 story building in order to build a 10 story building, doubling costs while halving the increase in housing. Housing is thereby expensive.
So you tax people who own housing. Well, that doesn't lower rents, because there are still the same number of people who need somewhere to live but now fewer people to invest in new construction because it's less profitable with more of the money going to taxes, so that lowers supply even more and rents increase to cover the new taxes.
This an undersupply problem. You don't fix it by taxing suppliers.
Every time I go looking for statistics to back this argument, I come away underwhelmed. In most cases I see little change in the ratio of dwellings to households over the past few decades.
Take a look at the first figure (HM1.1.1) in the following document - particularly those for the US, Canada, Australia, and NZ (all countries with prominent housing issues).
https://www.oecd.org/els/family/HM1-1-Housing-stock-and-cons...
On the other hand, I think there is a strong argument to be made for increasing underutilisation of housing (more second homes, short term rentals, etc).
These are country-wide numbers. The obvious problem is that there is existing housing in Detroit but demand for housing in San Francisco.
It's also somewhat self-defining. If millennials are forced to live with their parents because they can't afford their own home then this is counted as one "household" when there is demand for two.
There isn't anything inherently wrong with short-term rentals or second homes, they're just another type of housing demand that requires supply to increase to compensate. Until it isn't allowed to.
Taxing people who own multiple homes and taxing people who own apartment complexes are two completely different things and shouldn't be conflated.
You do realize that if someone can avoid the tax by renting it out then they'll just rent it out to a friend for a nominal amount to avoid the tax?
I'm talking about the size of the building. An actual apartment complex. I'm not even sure renting homes in general is a good idea. Let the market figure it out for someone who wants/can afford to own it.
Let's review the situation here. 1) The large majority of the land in the area is zoned exclusively for single-family homes. 2) Some people don't have the money to buy, e.g. no down payment or bad credit.
Where are they supposed to live?
If people (corporations) can't own infinity homes, the price of owning a home goes down.
That doesn't follow at all. If you reduce investment then you reduce production. The price only goes down if the cost of creating more of them goes down, unless you can remove so much of the demand that you no longer need to add more supply. The small percentage of single-family homes owned by corporations isn't that.
Nah. There's 30 homes and 30 people. 10 people own two homes apiece that they live in 50% of the time. That leaves 10 homes for the other 20 people to fight over, driving the price up. Pretty simple.
Your assumption here is that the number of homes is fixed and that there are otherwise enough for everybody.
Only ~5% of homes are second homes, not 33% as in your example.
Now suppose there are 25 homes and 30 families, better reflecting current reality. If you can't make more you're screwed. But you can create new housing. Zoning makes this expensive, because zoning requires it to be done in an expensive way. You have to destroy a large building to build an even larger one because multi-unit buildings aren't allowed where there are currently single-family homes. But you can do it. It just costs $600,000/unit as a result.
Since there are more families than existing homes, everybody bids up the price of housing units because they don't want to be homeless. When the prices hit $600,000/unit, construction companies build more units because now it's finally profitable. Then all the units stay that expensive because there are only just enough -- or not enough, but the remaining people don't have $600,000. But they don't go higher than that because that's the price at which more can be created under existing zoning rules.
If Richie Rich comes along and buys two second homes, that doesn't raise the long-term price, because the price is right at the threshold of profitability for new construction. So two new units get built at that price and the market price stays where it is -- at the cost of creating more units. If you want units to cost less, that cost has to go down, because units can't be added for less than that and eliminating 100% of second homes is not enough of a reduction in demand to shift from that being the price-setting factor.
Whereas if you could build new units for $200,000 then Richie Rich could buy a hundred of them and they'd still cost $200,000 because construction companies would just build a hundred more.
I'm pretty sure you lose a lot of tax advantages on rental properties (mortgage interest deduction, depreciation etc.) if you don't rent them at market rate.
If they rent it for a nominal amount, they're effectively losing money on the property and gambling on appreciation. If someone wants to do that, good luck to them.
You can't deduct depreciation on an owner-occupied house to begin with. The premise is that you're trying to distinguish between landlords and people who have a second home for themselves. But they can just rent it to a friend who in turn lets them use it.
If they're buying multiple homes to rent out at market rates to the general public then they're just an ordinary landlord -- the thing that wouldn't be paying a tax on "second homes" by design.
I thought the tax on "second homes" was a tax on landlording and speculation, not a tax on vacation homes. I think we might just be talking past each other here.
Why would taxing landlords reduce housing costs? It just increases housing costs for landlords, and in turn renters, as landlords become unwilling to pay for new construction until rents increase to cover the tax.
If landlords become unwilling to pay for new construction, that reduces the demand for new housing supply hitting the market. Which reduces its price and makes it more affordable to owner-occupants.
I don't know if it definitely works. But it's plausible. Tax what you want less of, right?
Construction occurs until the point that it stops being profitable, which is a price point more than a number of units. Zoning rules make it so you have to buy a 5-story building, then knock it down and pay the cost to build a 10-story building in order to add 5-stories worth of units. That's much more expensive than putting a 5-story building where there is currently a single-family home or an empty lot, which is prohibited. So if landlords stop being willing to pay for that, it doesn't cost less, it just happens less, because at any lower price the construction doesn't happen.
Which is how rents increase. Suppose 100 new units would have been built and landlords would have bought half. They stop buying, so construction companies only build 50 new units because there are only 50 buyers at a profitable price. Then demand for rental properties increases over time but supply of rental units doesn't, so rents go up. Then the landlords start commissioning new units again, because rents have increased enough to make it profitable again, but only for as long as they stay that high. The price of the building stays the same -- it's set by the construction cost -- but the rents go up because the landlord has to recover the cost of the building and the tax, or they're not commissioning a new building.
The trouble is you don't really want fewer rental units, unless you like high rents. What you want is maybe more owner-occupied units, but this is only a trade off when supply is artificially constrained -- otherwise you can build more of both, which is obviously better.
Whereas building fewer rental units without building any more owner-occupied units is quite useless.
The owner of a second home isn't a supplier though, they're a hoarder
But how are you proposing to distinguish them? It's all too easy to rent out a property on paper.
No, no, the government interjecting themselves into housing and creating an artificial scarcity, to aid their favoured voters at the time, is the problem. The idea that the solution to this is not to have the government step back but to have them become even more involved by redistributing this wealth distortion to their new favoured voters is a further level of madness.
This is my point above 100%. The government has been the sole source of these problems and now is desperate to solve them, steamrolling people without compensation.
The same, in my opinion, with inflation. Inflation has been caused by government monetary policy being too loose for three decades and effectively neutering its anti-competition authorities, but now they are getting tough on grocers as if the grocers are both the sole cause of the problem (false!) and that they made the problem in a vacuum (false!).
I have historically been extremely liberal, voting Liberal or NDP (even more liberal than the Liberals for those outside Canada) my whole life. The last few years of seeing our Liberal government fumble the ball so badly and point at everyone but the government itself (left and right governments of the current and past!) has made me realize the truth of the Reagan quote “government isn’t the solution to your problems, it is the source of your problems”.
Hayek’s Nobel speech on the pretence of knowledge is as accurate as ever.
The grossly inflated price comes from where though? I'd put it to you that a ban on usury where real estate was concerned would crush land values over night. Easy money (cheap loans) allow speculation, and speculation is one of the primary drivers of land value.
A far bigger driver of speculation is scarcity. Without that scarcity, loans would do nothing to drive land value.
Tight zoning is the primary driver of real estate value, because it further increases the scarcity of land. It makes small homes worth absolutely insane values.
Further, though eliminating cheap loans will limit the amount that people can pay for the real estate, it also reduces the ability of people to pay, so every person is back to the same place with scarcity. So though eliminating loans may change the face value of the cost of housing, in real terms, eliminating loans does nothing for ordinary's people ability to obtain housing where they want it. Only increasing supply by removing overly restrictive zoning will actually improve the material conditions for people.
All that said, we should definitely eliminate financial products in the US like the 30 year fixed rate mortgage, a government creation that does inflate prices, while reducing the ability of people to move. But we should get rid of it primarily because it reduces the ability of people to move by trapping them into the home they were in when mortgage rates were low.
What you call usury is also a government caused problem. It’s almost like 30+ year amortizations and ultra low interest rates… weren’t good for affordability. But now everyone but the government itself is the cause of this issue (in the government’s humble opinion). Blame immigrants, developers, AirBNB, investors… anyone but government! And if you must blame government, blame some other level of government!
Tbh, I think you nailed it. Policy largely drives the system in a law avoiding society.