Cities are taxing vacant homes to create more housing

San Francisco could soon become the latest city to tell property owners to put vacant housing on the market or pay up. On Feb. 8, city supervisor Dean Preston and supporters submitted a proposal for voters to decide this November whether the city should create a new vacancy tax, a measure now being adopted around the world to encourage potential landlords to put more housing on the market.

If passed, the measure will impose a tax of $2,000 to $5,000 on housing units unoccupied for more than six months, ostensibly freeing up more rental units in a city where they are in short supply. San Francisco’s city legislature estimates the new tax could bring 4,500 new units on the market over two years. The new proposed tax would exclude single-family homes and duplexes, and apply only to vacancies in multi-unit buildings.

San Francisco faces a shortage of 82,000 units, according to local governments’ report (pdf) on the region’s housing needs. As one of the most expensive housing markets in the US, median monthly rent rose 10% to $1,959 between 2015 and 2019.

Other major cities including Oakland, Paris, and Vancouver are imposing financial penalties on empty housing units. These can be vacant apartments in a multifamily building, second homes and seasonal properties, or in some cases speculative real estate purchased by foreign investors.  Most recently, Spain introduced a national vacancy tax as part of its new “right to housing” law.

Yet little data exists about the efficacy of vacancy taxes to increase the supply of available housing in competitive markets. Where vacancy taxes have been implemented, say housing policy analysts, some new housing units do come on the market and new tax revenue is generated for local governments. But even where successful, vacancy taxes haven’t been enough to meaningfully bring down prices across a city. To meet demand, cities need more new construction.

Do vacancy taxes fill empty homes? 

A vacancy tax attempts to increase the housing supply in two ways. First, it incentivizes owners of these vacant units to put them on the market, either for rent or for sale, adding to the overall active housing supply and eventually helping to bring down prices. Secondly, it generates tax revenue to fund more affordable housing. If property owners choose to leave units vacant and pay the tax, that revenue goes to the city and is invested in other affordable housing initiatives.

In its first year, Oakland’s tax raised $7 million which has gone toward a commission on homelessness, a mobile outreach team for homeless residents, and housing grants. In the Canadian province of British Columbia—home to Vancouver, one of the most expensive housing markets in Canada—a vacancy tax raised $231 million for regional housing plans over three years.

Lessons from Vancouver’s vacancy tax

In 2017, Vancouver introduced a vacancy tax alongside the regional government of British Columbia. The city’s “Empty Home Tax” charged 1% of the property value (since raised to 3%) for residential properties not occupied for at least six months of the year, with some exemptions. The regional government’s tax is 0.5% for Canadian citizens, and 2% for foreign property owners.

Three years later, it seems that the tax appears to have had a positive, if moderate impact on housing availability. A city report found the number of existing vacant homes (pdf) in Vancouver fell from 2,200 to 1,600 between 2017 and 2020 after the tax was implemented. An estimated 800 homes were either sold or rented as a result. An analysis (pdf) of the British Columbia tax done by the ministry of finance found that it “helped” add 18,000 rental units to the market in the Greater Vancouver area between 2019 and 2020.

Shane Phillips, a housing expert at the UCLA Lewis Center for Regional Policy Studies, and other observers largely agree that the policy has had some positive impact, but hasn’t changed housing market fundamentals. “This tax has raised millions of dollars per year, which is great,” says Phillips, “But in terms of making a lot of housing available for long-term rental, it hasn’t done a whole lot.”

What’s needed, he said, is new construction.  And vacancy tax is at best one tool at city leaders’ disposal to increase the overall housing supply. “It’s useful on the margins, and can generate more revenue,” says Phillips. “But it’s not a substitute for building more housing.”

In cities like San Francisco, where construction of new housing has been insufficient for decades, a vacancy tax won’t spur enough new supply to meaningful reduce prices. But Bay Area cities are ramping up the pace of new construction. Both Oakland and San Francisco now have plans to build thousands of units of new housing over several years. But they will face high construction costs and land use restrictions, and without more dramatic changes, new housing is unlikely to come fast enough to bring down prices for those struggling to afford housing.

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