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Prop 13 has nothing to do with real estate price inflation. If anything, shifting of property tax burdens from long-time homeowners to new homeowners would ten
by fiatmoney 11y ago
Prop 13 has nothing to do with real estate price inflation. If anything, shifting of property tax burdens from long-time homeowners to new homeowners would tend to suppress prices. Shifting that burden evenly across the population would tend to cause more churn as long-time homeowners get pushed out, but would do nothing to increase aggregate housing or lower aggregate prices.
Although, you can get pretty far into the weeds trying to evaluate the effect of housing stability on political economy - NIMBYism would be expected to be stronger in longer-tenure populations, for instance.
Stability of tax policy is a fantastic thing for encouraging long-term investment.
- curveship 11y agoWouldn't it discourage long-time owners from selling, thereby limiting supply and raising prices?
- sterl 11y agoIt would, and it does.
- DannyBee 11y agoIn theory, yes. In practice, if you own a currently 4+ million dollar home built in the 50's, you are paying at least 15-20k on it anyway. Here's an example currently for sale:https://www.redfin.com/CA/Los-Altos-Hills/27446-Black-Mountain-Rd-94022/home/1772683 https://www.redfin.com/CA/Los-Altos-Hills/27446-Black-Mounta... They are paying 18.2k. If it was reassessed today, they'd be paying 40-45k. If they do what most people who have lived in a home forever do, and are downsizing to something smaller (IE kids grew up, whatever), they will likely end up with either the same or less in taxes they pay now. So it's not like right now they pay nothing, and they'd pay a ton, it's "they pay a lot, they'd pay more".
- gorkemyurt 11y agowell that house was sold again 1990 so the taxable value was reassessed.
- DannyBee 11y agoYes, i did miss this. But most of the value was added since then :)
- sureshv 11y agoThis house changed hands in 1990 for $1M where it got reassessed - otherwise they would be paying 2-3k max if purchased and held since 1978.
- DannyBee 11y agoWhoops, missed that, sorry. It's still ... 25 years?
- pc86 11y agoEven the current taxes are over 1.5x what my mortgage is (including not only escrow payments for taxes but also PMI). Nuts
- vadym909 11y agowow- the price on this house was dropped $500K in the last 6 months. Looks like the bay area prices are finally crashing /s
- shostack 11y agoThat's quite the leap. How about you check out some broader data sets and then reassess your statement. There is less demand for homes at that price point. There is a MUCH bigger crunch for "entry-level" homes that doesn't look like it will go away any time soon.
- jmvoodoo 11y agoJust a single data point, but my parents bought their single family home in sf in 1972. It's currently worth about $2M. They pay roughly 400/yr in taxes and as a result there is no incentive for them to ever leave.
- fiatmoney 11y agoIn this discussion there are a lot of terminology considerations around "supply" (ie, housing stock) vs. "liquid supply" (ie, houses on the market) and "average prices" (ie, total RE value) vs. "marginal prices" (ie, expected home sales price).
- svachalek 11y agoA 4-bedroom house bought in the 70s is far more affordable than a 1-bedroom condo bought today, which creates a situation where no one can afford to move out of their homes. It's a massive tax benefit for themselves, their children, and grandchildren, that instantly and irrevocably goes away when they sell the house. No matter how high the market drives prices there is little incentive to sell. I don't know how much this has to do with the shortage of supply in the bay area but I'd be very surprised if it has "nothing to do" with it.
- fiatmoney 11y agoThose houses are lived in though (ignoring the whole issue of unoccupied investment properties). You can have an illiquid market with a ton of housing stock. The Bay Area has a problem with insufficient total housing stock, not with tax policy. You can see this via rental market prices, which are not locked-in like property taxes are. Imagine a Soviet grey-concrete apartment block. You get on the list when you're 18, and get your "free" apartment five years later, in which you are effectively stuck for the next 50 years. It's illiquid, there is high supply, there are low prices. Now imagine you can swap apartments by paying a huge bribe. It's still illiquid, there is high supply, there are low average prices, there are high marginal prices.
- Retric 11y agoThe problem is staying becomes increasing attractive over time. Retired people save money by staying put, young workers can't afford to move in. This breaks the housing market. SF is not a housing market it's effectively a planned communist community with a few bribes on the open market.
- thaumasiotes 11y ago> Retired people save money by staying put, young workers can't afford to move in. This is a problem of housing stock. If you build more housing, it's not going to be occupied by people who've been sitting on it for the last 50 years. That's impossible, because it's new.
- deleted 11y ago[deleted]
- yellowbeard 11y agoProp 13 has been argued (I'd say convincingly) to reduce liquidity: http://www.nber.org/papers/w11108 http://www.nber.org/papers/w11108 (Less churn - opposite of what you hypothesize)
- fiatmoney 11y agoNo doubt it reduces liquidity. Probably increases marginal prices as well. But I doubt it makes real estate more valuable in the aggregate except for maybe via second-order effects like policy stability or population composition.
- nwah1 11y agoReal estate has value because of the potential flows of rent that can be obtained. Property taxes fall on both land and improvements. While the taxes on improvements are passed on to the tenant, the taxes on land cannot be, as Adam Smith showed. The rent of land, being a case of a locational monopoly, is always as high as it can be. Thus, taxing land simply reduces the flows of rent that can be kept from controlling a location, and thus reduces the purchase price. This makes it easier for entrepreneurs to acquire land, since the up front costs are lower.
- MichaelBurge 11y agoI hadn't heard of this principle that it's impossible to pass tax increases on to tenants. I can't really believe Adam Smith has shown this to be impossible, when I know people who have said (paraphrasing), "The previous landlord has raised rents to match increases in taxes, water, garbage bills(the utilities are effectively costs of land), and we consider this reasonable". I feel like you could even make a bet on it: There's a nearby trailer park with some mobile homes on it. This should have value solely in the land, since the homes can be removed from the property. I'm counting the availability of utilities in the land. The county tax assessment on both land and improvements is public information. Suppose the tax assessment as a whole goes up 1.7%. If the trailer park owner is able to secure a 1.7% increase over the next year from his tenants, you pay him $10,000. Otherwise, he pays you $10,000. Do you trust Adam Smith enough to take that bet? It should be impossible, since that 1.7% includes an increase of taxes on the land which you're saying cannot be passed onto the tenant.
- kansface 11y ago> Prop 13 has nothing to do with real estate price inflation. Its hard to imagine the current real estate inflation in the case where home owners had to pay taxes against the fair market value. In other words, home owners would at least see some value in new construction. As it stands now, there is only downside.
- gozur88 11y ago>Its hard to imagine the current real estate inflation in the case where home owners had to pay taxes against the fair market value. Prop 13 exists in California because that's exactly what was happening. Prior to its passage you paid on the assessed value of you house, and it didn't stop prices from double digit percentage increases every year. People who'd owned their homes for decades were being forced to sell because the assessed value of the house had gone up so much they could no longer afford to pay the taxes.
- shostack 11y agoWhile that sucks, that sort of self-correcting market pressure is in fact required for a healthy real estate market. Yes, people would have been pushed out as prices increased. But as areas gentrify, there is no guarantee that the farmers and tradespeople who lived there get to stay forever. That's how other markets work. It sucks to those pushed out, but eventually taxes increase to the point where demand for the area diminishes. Further, since you'd have increased liquidity without Prop 13, people could actually afford to move to other areas so there would be more inventory. As it stands, that isn't happening because people can't afford to move, so the market is locked up. If we didn't have Prop 13, my gut says that the broader Peninsula would not be impacted to nearly the degree it is now (although perhaps SF would because it is so much smaller). People being forced to sell because their areas taxes increase substantially is an unfortunate, but very necessary thing.
- gozur88 11y ago>Further, since you'd have increased liquidity without Prop 13, people could actually afford to move to other areas so there would be more inventory. People over 55 can transfer the tax basis of their primary residence. In all cases if they move somewhere in the same county, and depending on local ordinances inter-county. So retired people living in the Peninsula can afford to move to other areas.
- dragonwriter 11y ago> Prop 13 has nothing to do with real estate price inflation. If anything, shifting of property tax burdens from long-time homeowners to new homeowners would tend to suppress prices. As I see it, the long-term expected costs for a purchaser with an average expected time to hold are neutral compared to an equal-revenue scheme that didn't favor long-term property owners over newer property owners. (Given the same assessed value.) OTOH, the future costs of holding property are lower compared to the same alternative for current property holders (since, even with a short holding period, some of the early, highest-relative-tax-burden years are sunk costs under Prop 13) under the same comparison. So, rationally, people are just as likely to want to buy property, and less likely to want to sell it once they've already bought it. This reduces supply and increases market clearing price.
- ScottBurson 11y ago> Prop 13 has nothing to do with real estate price inflation. Yes, it does, because it incentivizes municipalities to encourage commercial development (which tends to change hands more often) over residential. It's a classic unintended consequence.
- shostack 11y agoCorporations have been dodging taxes via Prop 13 for some time to the tune of potentially a $9 BILLION dollar windfall should they close some of those loopholes. I've heard of things like companies buying businesses outright so they can get the property, without buying the property as a transaction with the other entity. [1] http://www.sacbee.com/news/politics-government/capitol-alert/article23689426.html http://www.sacbee.com/news/politics-government/capitol-alert...
- DrScump 11y agoYes, and corporate inversions are another example (and another effect of tax law enforcement). The answer would be a Constitutional Amendment changing Jarvis-Gann protections to residences only, or even primary owner-occupied residences only. But the corrupt Legislature refuses to consider putting an LCA on the ballot to change this.