Taxing vacant homes as a means of improving housing affordability is a hot idea right now, despite mounting evidence that it wouldn't do much good.
Earlier this month, Canadian Prime Minister Justin Trudeau—whose Liberal party is coming out ahead in yesterday's parliamentary elections—tweeted that "houses shouldn't sit empty when so many Canadians are trying to buy a home. So, we're going to ban foreign ownership in Canada for the next two years, and tax the existing vacant, foreign-owned properties."
Houses shouldn't sit empty when so many Canadians are trying to buy a home. So, we're going to ban foreign ownership in Canada for the next two years, and tax the existing vacant, foreign-owned properties.
— Justin Trudeau (@JustinTrudeau) September 7, 2021
That national tax would duplicate local measures in Canada. In 2016, Vancouver, British Columbia, became the first city in North America to impose a tax of 1 percent of a property's assessed value on empty homes. This year, the tax increased to 3 percent.
Here in the U.S., a number of California cities have adopted or are considering adopting vacancy taxes. Oakland voters approved a vacancy tax in 2018, which charges the owners of empty or undeveloped properties between $3,000 and $6,000 a year. The Los Angeles City Council will put a vacancy tax on the 2022 city ballot.
The idea behind these vacancy taxes is two-fold. First, the financial penalty would incentivize the owners of empty homes—supposedly real estate speculators holding out for higher rents—to put their properties on the market. Second, the revenue from the tax could then be spent on affordable housing programs.
A vacancy tax "would help deter speculative vacancy, mitigate the harms of speculative real estate investment, and deliver necessary financial resources for community-centered programs to address evictions, housing instability, and houselessness," reads a 2020 report from a coalition of Los Angeles social justice groups.
Yet a new report published on vacant properties in San Diego—one of the cities that is now considering a vacancy tax—suggests that any levy on empty units would do little to raise revenue or boost housing supply.
That report, published by the city's Housing Commission (SDHC), used utility records to determine how many units in the city were left vacant for six months or more. (The study considered a unit unoccupied if its utility usage fell three standard deviations below a 60-month average.)
The SDHC obtained gas and electric records for 468,352 individual units from 2014 to 2019. During those five years, between 1,500 and 3,700 units were vacant for six months or more, giving the city a long-term vacancy rate of between .32 percent and .79 percent.
When examining water records, the SDHC study found 2,183 out of 252,324 units were potentially vacant for six months or more—a vacancy rate of .85 percent.
Contrary to what some politicians think, there isn't a mass of hoarded homes that would be pushed onto the market by a vacancy tax.
We can see this in the performance of Vancouver's vacancy tax too. Bloomberg reported in August that the city had hoped its vacancy tax would affect 10,000 empty or "underutilized" units in 2017, but discovered only 2,538. The number only fell by 625 units over the next two years—which the authors call "a rounding error in a housing market of nearly 200,000 properties."
The tax is credited with encouraging condominiums to be converted to long-term rentals. Nevertheless, rents in the city have continued to rise.
Indeed, if one wants to see housing affordability improve in hot real estate markets, more vacant units would be something to shoot for. The collapse in rents in ultra-expensive cities during the worst of the pandemic is closely linked to a rising number of empty units.
That's a phenomenon that predates the pandemic.
"Although the relationship is imperfect, there is a clear trend to the data: higher vacancy rates are associated with lower [rent] inflation," wrote Nicolas Buffie in a 2016 article for the Center for Economic and Policy Research. "The concept here is relatively simple: when a large number of rentals are vacant, rentiers must set prices relatively low in order to compete for potential renters."
Taxing vacant units is obviously politically popular. It's easy for politicians to make a scapegoat of real estate speculators or absentee foreign buyers.
But leaders interested in more than demagoguery should consider trying to boost affordability through expanding the supply of new vacant units, which will put downward pressure on prices across the board.