Housing crisis calls for high vacancy taxes

IN TORONTO, THE SOFTBALL APPROACH IS INTENTIONAL. — ADAM ZIVO

Vacancy taxes, which penalize property owners for leaving their homes empty, have become a popular idea in Canada as a means of discouraging speculators from driving up prices by hoarding supply. Although Canada’s housing-affordability problem would best be solved by building more homes, high, punitive vacancy taxes should be used as a stopgap measure to increase the supply of rental units.

Goaded by astronomical growth in property values, speculators frequently buy homes and keep them off the rental market, confident that lost revenue will be more than made up for by the profits made through flipping their investment properties. As a result, Canadian renters have had to compete for fewer homes, driving up rental prices and exacerbating the nationwide housing-affordability crisis.

Taxing vacant homes is one way to ensure that housing built for people to live in is, well, actually lived in. So far, the results have been promising. Vancouver, which implemented a vacancy tax in 2018, has already seen a 25-per-cent reduction in vacant homes.

The City of Toronto is also considering implementing a one-per-cent vacancy tax sometime next year. Meanwhile, the federal government will be launching its own one-per-cent vacancy tax in January — the caveat being that it will only apply to foreign investors and thus will not address domestic speculation.

These policies are a great start, but two issues stand out: 1) these taxes are far too low to be truly effective; and 2) while vacancy taxes are a strong short-term solution, they should not distract policy-makers from addressing the deeper structural issues that fuel Canada’s housing-affordability crisis.

A one-per-cent tax, as proposed by both Toronto and the federal government, is a joke and barely makes a dent in the profits of property speculators. By one estimation, the average annual return on investment for Toronto real estate is around eight per cent (averaged across five years). This is a fairly conservative figure, as average housing prices in Toronto rose 17 per cent between June 2020 and June 2021.

Though lost rental income diminishes their return on investment, in this context, a one-per-cent vacancy tax is nonetheless akin to telling a speculator, “Put your housing on the rental market or I swear to God I’ll ... slightly reduce your profits.” This is obviously not optimal policy-making, which is why Vancouver increased its vacancy tax to three per cent this year.

In Toronto, the softball approach is intentional. Vacancy taxes are based on owners self-reporting whether their properties lie empty — a system that can be easily abused. While Toronto’s city staff have proposed setting up a robust auditing system, they are nonetheless concerned that implementing a higher tax rate may cause property owners to become non-compliant.

But why should property speculators be treated with velvet gloves simply out of fear that they might not obey the law? What is the point of a punitive tax if it avoids imposing real costs?

Consider that Toronto estimates that a one-per-cent tax will bring in around $60 million annually, while the annual cost of paying auditors and compliance officers is estimated to be $1.3 million. Given this disparity between revenue and cost, it seems like a no-brainer to just invest in better auditing and surveillance infrastructure to ensure that property owners are not evading taxes.

Fiscal conservatives might balk at the idea of more taxation, but the fact is that vacancy taxes are highly avoidable and are, in fact, more akin to a fine imposed for bad behaviour. No wealth is taken from owners if they do the right thing — which, in this case, generally makes them money, too.

To make a comparison: if you supported punishing speculators who monopolized personal protective equipment at the beginning of the pandemic, a vacancy tax should also make sense. Property rights are fundamental but never unlimited — people cannot irresponsibly hoard commodities that are sorely needed by society.

However, even if vacancy taxes are given real teeth, it should be noted that, though they are a great short-term solution for housing affordability (for renters, not aspiring homeowners), they are symptomatic of a deeper problem: Canadian housing markets are overheated and price increases are far outpacing inflation.

Too many people want to buy housing and there is too little housing to buy. Until that problem is solved, prices will balloon, speculation will continue, vacancy taxes will remain necessary and home ownership will grow yet more unobtainable, particularly for the young and the marginalized. Cooling demand is one solution, which vacancy taxes address by making it slightly harder for speculators to enter the market.

In a similar spirit, foreign buyers taxes also help curb speculation — an example being British Columbia’s 20-per-cent tax on foreign purchases of homes in Greater Vancouver. Yet demand-side solutions, while critical, should not distract us from more serious supply-side problems.

Canada does not build enough homes. We have the lowest number of per-capita housing units of any G7 country and new supply is not forthcoming — Toronto, for example, needs 50,000 new units annually to keep up with population growth, but only produces 40,000.

This is a product of municipal policies that strangle new housing supply with red tape and onerous regulations designed to appease residents who don’t want development taking place in their neighbourhoods. When municipal governments refuse to allow gentle densification in residential neighbourhoods and reflexively reject new downtown condo towers as “too tall,” housing supply suffers.

So let’s implement vacancy taxes and give them teeth, but let’s not forget to address the root cause of the problem: we need more housing, and we need a lot of it.