Property tax must be used if we want to fix the housing crisis

Irish Times

2 days ago

Nothing encapsulates the cakeism at the heart of the
housing shortage
quite as well as property tax.
Earlier this month the
Cabinet
signed off on the Local Property Tax regime for the next four years which will come into effect in November. Predictably, the increases will be small, and the purpose of the exercise seems to have been to ensure that people's
tax
bills do not go up in proportion to the 25 per cent jump in property prices recorded since rates were last set.
Most homeowners – those with houses worth €525,000 or less – will see their bills increase by €5 to €23 a year. Those in the top band of €1.995 million to €2.1 million will pay an extra €389 a year. The Cabinet also approved plans to extend rent pressure zones whilst relaxing rent controls for new builds on the same day which hoovered up the headlines.
It may seem to be politically expedient to leave property tax at its current relatively low level but from the perspective of tackling the housing crisis it represents a missed opportunity. Property taxes are a very useful tool by which governments can influence the property market and the behaviour of buyers and sellers in particular. Instead, we left it in the tool bag.
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The most obvious way in which the Government can use property tax to improve the supply of new housing through the utilisation of existing housing is to raise it to a level where empty nesting becomes unattractive.
According to a study by the Economic and Social Research Institute (ESRI) published last year, two-thirds of us live in houses that are bigger than our needs, which is more than twice the European average. The figure rises to 88 per cent for people aged over 65.
We seem to have arrived at this situation – where our homes are bigger than the rest of Europe's but have fewer people living in them – through a combination of cultural norms and a lack of attractive downsizing options.
We have a clear preference for houses over apartments but there is something of the chicken and egg about this because historically we didn't build very many apartments.
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The ESRI duly noted that housing policies that 'incentivise and facilitate the construction of relatively smaller housing units will be an important part of the policy response' to the housing shortage.
Building more one- and two-bedroom homes and apartments in the right sort of areas would clearly create a pull factor that would encourage downsizing and thus free up larger homes in urban areas. There is an obvious multiplier effect by which the construction of a two-bedroom apartment frees up a three- or four-bedroom house.
The tweaks to the rent control legislation announced this month that exempt new builds from rent control will have negligible impact in this regard because most downsizers will most likely want to buy rather than rent.
Which leaves us with property tax. One of the reasons people continue to live in their half-empty houses after the age of 65 – the point after which most are on a lower or fixed income, such as a private or state pension – is that they can afford to do so. The lack of a significant property tax is a factor, and there is plenty of research to show that property tax can be a powerful push factor for people in this situation to downsize.
This is certainly the case in the US where
comparisons
between states with relatively high and low property taxes indicate that low taxes incentivise empty nesting, whilst higher taxes incentivise downsizing.
It is neither desirable nor plausible to whack up property tax to force elderly retirees out of their homes, but making property tax a no-go area in the midst of generational housing shortage isn't very sensible either.
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Nowhere in the Government's political calculations about the new LPT rates was the use of the tax as a push factor in terms of encouraging downsizing considered despite the obvious potential gains.
The use of LPT to encourage downsizing would have to be part of a wider strategy obviously. Apartments would need to be built on a scale in existing residential areas for downsizing to be an attractive option. This in turn would require a planning system which put the common good before the legal antics of interested parties and bat lovers which seem to stymie many efforts to build apartments in suburbia. Sweeteners, such as tax breaks for downsizers, could also have a role to play.
It would also require the Government to come to the realisation that they are more likely to lose their job because voters don't have homes than they are because they put up LPT rates.