If you think the idea of taxing owners of vacant homes is a hot topic here in Vancouver, just take a look at New York City, where the real estate industry can currently think of nothing else.
Like our own, NYC’s high-end real estate market is characterized by overseas (or out-of-town) buyers snapping up luxury properties as investments or pieds-a-terre. And, like Vancouver, this has long been causing anguish among residents priced out of both the buying and renting markets.
Manhattan in particular, especially Midtown around Central Park, is seeing the construction of multiple massive luxury condominium towers, such as the 90-storey One57, much of which are being pre-sold to uber-rich out-of-towners. The City’s Independent Budget Office says that in some of these developments, the share of non-resident owners “could approach 50 per cent.” Sound familiar?
So this past week – again, just like in Vancouver – a new tax is being considered by New York mayor Bill de Blasio, aiming to squeeze more cash out of those overseas buyers and placate frustrated New Yorkers.
The idea, pitched by the city’s Fiscal Policy Institute (FPI), is to apply an additional annual property tax on owners of homes worth more than $5 million, but with an exemption for primary residences.
The “pied-a-terre tax,” as it is becoming known, would start at 0.5 per cent of the home’s value for homes over US$5 million, increasing in increments to a maximum of four per cent for homes over $25 million.
According to the Wall Street Journal, a six-bedroom penthouse currently being sold for $95 million at 432 Park Avenue, a skyscraper being built near 57th Street, would face a surtax of $3.1 million a year on top of $260,000 in regular annual property taxes.
The FPI says: “With the tax starting at 0.5 per cent for the first $1 million in value over $5 million, and rising such that the four per cent rate applies for the value over $25 million, an estimated $665 million could be generated [annually].”
An attractive proposition for mayor, no doubt, and for the city’s residents – and voters – who would likely support it (and a mayor who introduced it) as they would reap the public benefits of additional city income without having to contribute a cent.
But the local real estate and development industry is in uproar over the idea. According to US real estate website The Real Deal, Steven Spinola, president of the Real Estate Board of New York, said that even proposing such a tax could have an immediate impact on non-resident buyer sentiment and ultimately damage the real estate market.
“The problem is that when you propose this kind of economic hit on any segment of the market, you’re putting a significant chill into the market,” said Spinola. “What’s going to happen while there’s this uncertainty about whether or not this tax is going to be adopted?”
It certainly seems likely that non-resident buyers would seek lower prices for luxury homes to offset the additional tax burden – potentially leading to a softening of prices or even, as some in the industry are warning – a high-end market collapse.
The WSJ reports that Gary Barnett, president of Extell Development Co., the developer of two other towers on West 57th Street, said the taxes could put an end to such buildings.
"There is no way in the world that any luxury buildings like these are going to get built again," he told the WSJ. "There is the problem of killing the golden goose." And does the mayor of New York really want to destroy City Hall’s relationship with developers and the wider real estate industry?
Not only that, the problem of additional bureaucracy, particularly in terms of policing what exactly qualifies as primary and non-primary residents, is another fly in the ointment (just as it is with Vancouver mayoral candidate Meena Wong’s vacant home tax proposal). For example: would the New York tax apply to snowbirds who live in their Manhattan property 50 per cent of the time? What about someone who lives there 40 per cent of the time and divides the rest of their life between multiple other properties, therefore making the New York base a kind of primary residence? Should there be degrees of taxation for proportions of time being spent at the property? How will city officials check whether someone who claims to be a resident of their property is really living there? How many ways of defrauding the city to dodge the tax will be adopted?
All these questions and doubts just prove that any new property tax, whether in New York City or here in Vancouver, needs to be fully thought through to assess its long-term implications for the real estate market and for the city and its people.
Let’s hope that Bill de Basio and Vancouver’s mayoral candidates all take that lesson to heart.