Vancouver’s Vacancy Tax: A Terrible Idea

Vancouver’s affordable housing issue is going to be partially resolved by a vacancy tax?  Don’t count on it.

What do you think of when you hear the words “affordable housing”? Is it that there isn’t enough units available in the rental market or rental rates are too expensive? Or is it that the cost to purchase a house, townhouse or condo is far too steep - despite rock bottom mortgage rates? If you see the issue of affordable housing as the latter, a vacancy tax on empty homes isn’t going to do a thing.

Vacant, Multi-Million Dollar Homes Aren’t the Issue

The City of Vancouver staff provided council with a “Vancouver Housing Initiative Update” on March 8th. This comprehensive and informative study found the following:

  • Vacancy Rates Down - Over the last 12 years the vacancy rate for all housing units in Vancouver has dropped from 4.9% to 4.8%.
  • Houses Are Full - Single Family and duplex units have a 1.2% vacancy.
  • Apartments Are Fuller - Vacancy rates in rentals are nearly 0%.
  • Empty Condos - The condominium non-occupancy rate is 12.5%.
  • How Many Empty Homes? - 10,800; 90% of which are condos.
  • Northwest Vancouver - Consisting of West Point Grey, Kitsilano and Fairview, it has the highest non-occupancy rate at 7.4%. This area also has the smallest population; most expensive homes and the least number of empty units in total.
  • Southeast Vancouver - Has the lowest non-occupancy rate at 2.9%.
  • Lowest Vacancy - Single Family Homes at 1.2%.
  • How We Compare - The rate of empty homes in Vancouver and the region is in line with other large cities in Canada.
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So what to take from this extensive report by Ecotagious Inc.?

Bottomline: Vacant homes in Vancouver are at the same level today as they were 10 years ago. These rates are consistent with other cities across Canada. And the expensive Westside Vancouver mansion represents a fraction of the overall vacant homes.

More Units vs. More Money

Suppose the City of Vancouver is successful in implementing a Vacancy Tax. The goal is to generate one of two results:

  • Create More Units for Rent
  • Collect More Taxes

In the staff report to City Council, the possible factors driving empty homes included:

  • Investment
  • Probate
  • Hoteling
  • Snowbirds
  • Development
  • Timing In Sale or Rental Process
  • Renovation
  • “Flipping" 

So how many of these vacant homeowners are going to be motivated to rent their homes to avoid being taxed?

Consider this.  If the tax is too low, vacant homeowners might just accept this as a cost of owning real estate in Vancouver.  Therefore, units are NOT made available to the market. If the tax is too high, there WILL BE a series of unintended consequences (read on).

Participation Rate

If the City of Vancouver is successful in achieving a respectable participation rate of say 50%, this will only increase the overall vacancy rate of the rental market by 2.4%. More importantly, this also doesn’t guarantee that rental rates will decline, because landlords may hold out for higher rents, especially if they are not motivated to rent in the first place.

And where do you draw the line as to who has a vacant home and who does not?  Do you now start taxing traditional landlords for every month that a unit isn’t rented?

The list goes on…

$1 of Tax ≠ $1 Affordable Housing

Affordable housing extends far beyond occupying some 10,000 vacant homes. It will not be solved by implementing a vacancy tax, which will be costly to implement.

All taxes come at a cost, most of which are paid for by the tax payers themselves. There’s the upfront cost of policy making, implementation, policing and ongoing administration. The net cost is some amount less what is being collected. The more difficult to police and administer a tax, the less money there is to put towards the end goal.

With every dollar collected from this vacancy tax, how much will the City of Vancouver have to put towards affordable housing?  $0.80, $0.60, maybe only $0.50?

We simply have no idea how much revenue is going to be generated from this tax.  And we also have no idea how this extra revenue is going to be used to provide more affordable housing.

Unintended Consequences

And for the finale, the unintended consequences of a Home Vacancy Tax. Consider these:

BC Hydro - If monitoring electricity consumption is used to determine which homes are vacant, it will take no time at all for a vacant homeowner to install one or two Nest thermostats and “Wham!” you have full control of your heating and electricity usage from any mobile device, anywhere in the world. Not exactly the outcome you want for the municipality trying to be the “Greenest City in the World by 2020”. 

Pseudo Rentals - What if a landlord makes a claim that they simply cannot find a suitable tenant or that no one is willing to pay the rent they are asking?  Does the City of Vancouver now start getting involved in overseeing the rental market?

Higher Rents - Has anyone thought about the fact that this vacancy tax could just be simply viewed as another cost of owning real estate in Vancouver.  As such, landlords may choose to simply increase their rents to offset this actual or potential cost. Now you would have an even worse affordability problem.

Suburban Migration - Suppose more rental units do open up in Vancouver and it does reduce the cost to rent.  How long will it take before someone renting in North Vancouver, Burnaby or Richmond decides to move to Vancouver for cheaper rent? Soon enough the Vancouver rental market adjusts to both an increase in supply and demand - the net result being a wash.

Real Estate Prices - The final piece of the equation is the value of real estate in Vancouver. If this vacancy tax is onerous enough, in theory it could lower property values in Vancouver.  But by how much?  Does the Mayor and City Council want to start a market correction, which would only occur in Vancouver?  The vacancy tax would have to be pretty high to do so.

And if this did happen, appraisal values would decline. Since property taxes are based on these values, the city would inevitably receive far less in property tax revenue due to the declining values.

Back to Affordable Housing

Most people would define affordable housing as cheaper house prices rather than lower rental units.  So this vacancy tax, if at all successful, only addresses those who have no interest or ability to buy.

Those, however, who want to buy a home, townhouse or condo in Vancouver and simply cannot afford it, this vacancy tax won’t do anything to help you buy a home sooner.

The Solution

While I can’t profess to have come up with a perfect solution, I do believe there are better options.  In my next piece, I’ll make a case for adding on a sur-tax for foreign owners or owners of multiple residential homes… All tracked through one simple identifier called your Social Insurance Number.