Monday, June 9, 2014

Reduce Speculation and Limit Gentrification: Penalize Absentee/Pied-à-Terre Owners

The cities where housing prices are highest and the gentrification debate is the most forceful -- places like San Francisco, New York, Vancouver BC, and London -- all share one quality: they're world cities. There are a number of ways to define what makes a city "world class," but the salient attribute here is that each of these cities is the target of significant foreign investment, particularly in the housing sector. Wealthy investors, foreign and American alike, park their money in these cities and crowd out less affluent families that would otherwise choose to live in these cities, if only they could afford to.

While cities like Chicago, Austin, and Seattle can typically stave off drastic price increases by just building enough housing to meet demand, that's not always possible for world cities because demand isn't just local, or even national -- it's global, and in an era of growing inequality the demand for luxury investment properties and pieds-à-terre is vast. That demand is an obstacle to providing an adequate supply of affordable, middle-class housing, but it needn't be. If harnessed appropriately, it could even be a strength.

The 1004-foot, 90-story One57 Tower in Midtown Manhattan
is home to just 155 residential units. Photo from New York YIMBY.
By charging the wealthy owners of these seldom-inhabited homes a more aggressive property tax, we can discourage this kind of investment on the margins and collect more revenue for cities to support their essential services and affordable housing goals. Besides discouraging speculative investment on the part of potential owners, it would limit the incentive for developers to produce massive-yet-low-density towers that provide little additional housing in the most desirable neighborhoods.


Right now there are two problems in world city housing markets. The first is that there's just not enough housing to meet demand, usually even just the demand of local and regional residents. That results in consistently low vacancy rates, which in turn leads inexorably to higher prices as a large supply of would-be residents compete over a small supply of available housing.

The second problem is that not all of the homes in these cities are even occupied. Wealthy foreign investors view these markets as safe, and often even lucrative, places to park their cash, and they have the added advantage of making great vacation spots for a few weeks out of the year; plenty of rich Americans do the same thing, owning homes in cities across the country that are generally only inhabited for a small portion of each year. This quote from a 2011 New York Times article sums up the problem:
In a large swath of the East Side bounded by Fifth and Park Avenues and East 49th and 70th Streets, about 30 percent of the more than 5,000 apartments are routinely vacant more than 10 months a year because their owners or renters have permanent homes elsewhere, according to the Census Bureau’s latest American Community Survey. 
In one part of that stretch, between East 53rd and 59th Streets, more than half of the 500 apartments are occupied for two months or less. That is a higher proportion than in resort and second-home communities like Aspen, Colo.; Palm Beach, Fla.; Virginia Beach; and Litchfield, Conn.
Not only does this leave many neighborhoods barren of any night-time and weekend activity, it takes housing off of the market for actual potential residents. Every unit that goes unoccupied is taking up space that could go to a family that would jump at the chance to live in a place of such opportunity and vitality. Those 5,000 vacant apartments in New York's east side could house 5,000 somewhat less affluent (though still undoubtedly wealthy) families, those families' current units could then be occupied by a slightly lower-income demographic, and so on all the way down the line.

The problem is that in many of these cities, the property taxes paid by the wealthy owners of these homes aren't nearly punitive enough to discourage absenteeism. If you pay 2 percent of your home's value on property taxes but your home's value grows by 5-10 percent or more each year, you're still coming out ahead. With the added status and convenience that comes with an extra home in London, New York, Los Angeles, or wherever else, the appeal of buying is obvious, even if you almost never use it. When people choose to invest more of their money in stocks, stocks go up and everyone wins. When people choose to invest more of their money in homes, prices go up and everyone that doesn't already own property loses.

The Fix

The way to fix this is to change the calculus so that owning a second home in these cities is no longer a profitable investment, or at least considerably less profitable than alternative investments. That can be done in a number of ways. It doesn't really matter how you choose to do it, as long as it works. An important side effect will be that as demand among the super-wealthy decreases, the upward pressure on housing prices will subside to some degree. And, bonus!, your city gets more tax revenue.

The simplest way to discourage speculative investment is to raise the tax rate on uninhabited properties. That might mean increasing property taxes to 3, 5, or 10 percent (or more) -- that's best determined by the guys in finance. It'll depend on whether your city wants to discourage all speculative/vacation property investment, or if it's content with leaving these properties vacant if it means raising a lot of extra revenue for the city. There's also some wiggle room in determining what the threshold is for being subject to these rates. Should you be exempt if you live in the home at least three months out of the year? Five? Six? Again, the specifics will depend on the exact goals that the locality is trying to achieve.

If tax rates are capped as they are in many states this might require a bigger push, advocacy-wise, to create legislation that can make this happen. That said, it's hard to see a populist policy like this, one that punishes wealthy investors for wasting space in our most productive and desirable cities, as anything but a winner. Alternatives in lieu of a property tax might include explicit fines/fees. Another option would be to charge these owners for the income tax they earn outside the state, but at least in the case of New York state, that was just ruled unconstitutional.


  1. I have to take major issue with your recommendation. First of all, I'm not sure you quite understand what's going on with these mega-towers. The new towers like One57 are being built in commercial/tourist areas, not traditional residential areas. These areas don't have things like schools, supermarkets, and other things that year-round families would require. The fact that the towers are empty really doesn't bother anyone, as the land would otherwise be taken up by boring office towers which empty out at night and on weekends.

    Second, the ultra-wealthy condo owners still pay property taxes. Quite a bit, actually. And since they use very little in city services, the city already comes out way ahead on these guys.

    Third, high-rise development in places real New Yorkers don't live doesn't prevent higher density development in places where New Yorkers really do want to live, so I'm not sure what discouraging this development accomplishes.

    Fourth, say what you will about the high-rise towers, they are certainly NOT low density. 155 residential units is still an awful lot for such a small piece of land (the new towers are generally quite skinny). Some of these towers are replacing low-rise apartment buildings with much fewer units, or even parking lots or rail yards that previously housed precisely 0 people and provided negligible jobs. Don't forget that it takes a massive staff (fully paid for by the condo owners) to keep up these buildings. Furthermore, these are generally pretty well paying jobs, as opposed to the low-wage parking attendants these buildings are displacing.

    In short, I would advocate for MORE ultra luxury towers and MORE high rise condo development, not less. These towers add to the city's tax base without requiring very much in the way of city services, are beautiful to look at, and they generally increase the desirability of a given neighborhood. The ultra wealthy are coming to cities like NYC no matter what. Better that they buy condos in these exclusive towers than buying up 3 or 4 apartments in nice residential neighborhoods and combining them into one sprawling unit that is barely inhabited (which is what was generally happening before these towers were built). Besides, the way things tend to go in NYC, today's ultra luxury apartments will some day be ordinary housing for upper-middle-class New Yorkers.

    1. Fair points Tal, but I think you're misinterpreting my argument to some degree. I've actually argued in favor of luxury developments before -- not specifically promoting them, but allowing them to happen as they will -- basically for the reasons you've outlined. They're not inherently bad, or at least the positive balance of additional revenue vs the city services they consume makes them worth accepting.

      My argument is not to limit high-rise/luxury development, but to tax individual units that are owned but unoccupied at much higher rates. The reality is that there's a limited amount of development that's going to happen in any given city, and expending the capital (financial and political) on projects like One57 that result in very few ACTUAL residents is a waste of that capital in my opinion. It would be one thing if the owners were living in these units, because it would mean that by residing in this property they're not competing for others and driving up the values of the rest of the housing market. That's not the case I'm writing about though. I'm talking about people who own but don't live in these units, and I'm okay with even that, but not if it's turning into a profitable investment for these owners.

      I would argue that the "investment-ization" of housing is THE leading cause of housing affordability problems in this country, and this seems like the low-hanging fruit for preventing that, at least at the highest levels of the market.

      I'd also note that this isn't specifically aimed at the highest levels, though in practice that might be the cheapest/easiest to enforce (relative to the additional income anyway). The point is to prevent investment-oriented, unoccupied housing at all levels, and that almost certainly happens in the mid- and upper-middle market just as it does in the uber-wealth buildings like One57.

    2. I know you are generally, if not pro luxury development, then at least willing to accept it, which is why I was so surprised by this post. I'm not sure the units in One57 are such a good investment GOING FORWARD. Sure, they were a great deal in hindsight, but hindsight is 20/20. The stock market has also been a great deal since March 2008, but that doesn't mean it won't crash again. The people owning these properties are taking major risks. The taxes they pay are already far more than what they demand in city services.

      I also do not buy into your argument regarding limited capital (financial or political) for development. These buildings may be big, but they're just a drop in the bucket compared to, say, overall US mortgage lending. I also have never seen any politician turn down a mid-rise apartment block in Brooklyn because there's too much high rise development in Midtown. It's not even the same politicians involved in these decisions, for the most part. In fact, as I said earlier, these buildings tend to draw absentee owners OUT of the good residential neighborhoods (and out of smaller buildings where they must combine units to achieve a palatial home) and into dedicated buildings in tourist-friendly locations.

  2. I wish we had the "problem" of having people invest in my city and building wonderful towers, paying taxes, and not consuming services. So your recommending that consultants be taxed extra for going on business trips? Are you suggesting government issues tags to track our location and see if we are in our dwelling?

    1. If your city doesn't have this "problem" then I'm not suggesting that you adopt this policy. This is only for a very small set of cities throughout the world that DO suffer negative consequences as a result of developers catering to a vast supply of highly affluent international residents. This also has absolutely nothing to do with people that go on business trips -- I think it's pretty clear from the way I've written this that if you owned just one home and were away frequently then you wouldn't be subject to this, since obviously your home is still there primarily for your housing, not as an investment. And for the record, we already do tax those consultants on their business trips. It's called the hotel tax. As far as tracking, I doubt anything so intrusive would be necessary. It could be as simple as USPS keeping tabs on occupancy (which they do already), or since the government already knows how many homes people own, they could just direct you to identify your primary residence and anything that wasn't a primary would be subject to this tax at the municipal level.