Pearls and Irritations

Vancouver’s response to the housing affordability crisis,  now includes a new Empty Homes Tax at 1% per annum of the value of each empty home covered. Australian reports suggest that there may be 90,000 empty dwellings in Sydney and 83,000 in Melbourne. 

Vancouver, with a population of around 2.5 million (roughly half that of Sydney) and the highest population density in Canada, has recently introduced an Empty Homes Tax.

The EHT initiative is one part of Vancouver’s efforts to ease housing affordability for renters and focuses on behavioural change. It is the city’s latest response to the housing crisis affecting many parts of the world.

The EHT went into effect from 1 January 2017 and is initially set at 1% per annum of the value of properties to which it applies. The effectiveness of the initiative will be reviewed annually and changes considered in the light of experience.

Background

Demographia International’ recent annual survey ranked Vancouver as the 3^rd least affordable amongst the major markets reviewed across the 9 countries covered. Sydney ranked 2^nd least affordable, followed by Melbourne in 6^th place.

Key data cited by Vancouver’s policy makers as a rationale for the new tax includes the following:

• A high level of renters, at 51% of Vancouver’s householders;
• Very tight (near zero) rental vacancy rates in Vancouver;
• Census data from 1981 to 2011 demonstrating that the percentage of Metro Vancouver homes left vacant or not used as a primary residence had almost doubled since 1981;
• Estimates that put the number of empty homes in Vancouver at around 4.8% of all homes in the city, including some 90% of apartments and condominiums and;
• The number of homes left empty for at least 12 months was estimated to number some 10,800.

To put Vancouver’s estimated 10,800 empty homes in perspective, there are indications that Sydney and Melbourne could have some 90,000 and 83,000, respectively.

An article in the Sydney Morning Herald in March 2016, quoting analysis by UNSW’s City Futures Research Centre, suggests that Sydney’s housing affordability crisis was being artificially inflated by up to 90,000 properties standing empty in some of the city’s most desirable suburbs.   The SMH article also references a December 2015 water usage report by think tank Prosper Australia, pointing to nearly 83,000 unoccupied properties in greater Melbourne, equivalent to approximately 19% of investor owned housing stock.

Increasing utilization of the existing built environment

The government policy objective behind the EHT is to increase the supply of rental housing by making better use of Vancouver’s existing residential built environment, through encouraging owners of investment properties to rent them out rather than leaving them vacant.

It is part of a strategy to exploit the under-used potential of existing residential built environment, the subject of a prior blog-post by this author.

Vancouver’s EHT represents a fiscal “stick” approach, to be contrasted with fiscal “carrot” approaches like the UK’s long-standing Rent-a-Room scheme. The scheme incentivizes live-in landlords in the UK with excess bedroom capacity to let out spare bedrooms in their property, with the carrot of being able to earn up to £7,500 per annum tax free through doing so.

Key features of the new tax

Vancouver’s new EHT has the following key features:

• Properties to which it applies: Residential property that was neither the principal place residence of the owner or their permitted occupier (eg. family member), unless they are tenanted for more than 6 months during a calendar year (in minimum increments of 30 consecutive days);
• Tax rate: 1% per annum of the assessed value of the property
• Exemptions: Limited range of exemptions to cover special situations. Although full or partial exemption of second (or holiday) homes was considered, no such exemption was ultimately included due to concerns about complexity and administrative costs associated with compliance;
• Assessment process: Annual property status declaration by property owner

Research and consultation

Vancouver’s new EHT was implemented after what seems like a comprehensive research and evaluation exercise, including an 8-month consultation process with local and international experts, key stakeholders and the public. Ernst & Young assisted the City in program design.

Consultation included public surveys that elicited responses totalling 25,000.

In one such survey, out of the 10,000 people who responded 63% endorsed the proposed policy direction. Amongst the 27% of respondents who were renters, the level of support was higher (81%) than among owners (56%). The latter accounted for some 69% of respondents.

Financials

One-off program costs associated with the EHT are estimated at C$4.7m in aggregate during the first 3 years, reducing to C$1.5m per annum thereafter. All such costs are forecast to be covered by EHT revenues. 

Financial modelling around key variables suggests that at the proposed initial tax rate of 1% the EHT could result in between 1,500 and 4,200 units being converted to occupancy. However, the policy makers acknowledge that predictions of this sort are difficult to make and only time will tell.

Behavioral change the key

Highly targeted fiscal policy of the EHT kind can have two effects, one behavioural and the other revenue raising. Changing behaviour was certainly the main objective, however any excess tax revenue over and above program costs is intended to fund local affordable housing initiatives. 

Conclusion

Whether the new EHT succeeds in changing behaviour by those who leave their second homes empty for large amounts of time remains to be seen. It is an interesting case study on the use of highly targeted fiscal policy to increase the supply of rental housing. Evolving from and impacting the existing built environment, such supply also has the merit of sustainability and speed to market.

If a policy approach of this sort were to find favour in Australia, it would probably be up to the States to levy the relevant tax, possibly via an amendment to their respective Land Tax legislation. 

Oliver Frankel is a former corporate finance and M&A lawyer, who has spent the second half of his career in finance, investment and management. Most recently, he has taken a strong interest in how to address the affordable housing crisis.

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