UBC economist proposes solution to Vancouver’s affordability crisis

New research from UBC Sauder School of Business Associate Professor Thomas Davidoff could help combat Vancouver’s housing affordability problem. In new research published in the Canadian Tax Journal, Davidoff outlines how a new model for calculating property tax could help renters.

In this Q&A, Davidoff explains how the current property tax model in Vancouver contributes to unaffordability and economic inefficiency, and how his new model could help to solve these issues.

What is the current model for property taxation in Vancouver, and what is wrong with it?

Housing supply in Vancouver is very inelastic, meaning that, even if prices rise, it’s hard to add new quantity. You hear in the news all the time about how hard it is to get housing built in Metro Vancouver.

Generally, economists believe that taxes should be higher on goods that are supplied or demanded inelastically. Because Vancouver has notoriously inelastic housing supply, one might expect property tax rates to be higher here than elsewhere in Canada; however, property taxes are actually very low in Vancouver. We have a high tax base because properties are expensive, but by any measure the property tax burden is low here.

We’ve got a really out-of-balance tax system here—it’s a great place to buy real estate but not a great place to make a living, in terms of tax policy.

What does your research propose that can address this?

Instead of measuring property taxes based on a property’s value, I propose basing them on the potential rent for the property. Using this measure, Vancouver’s property taxes should be about four times that of a typical Canadian city. Instead, they are currently below that of a typical Canadian city, which is way out of whack.

Essentially, what I am proposing is a transfer from owners to renters, meaning property owners would pay more taxes and renters less, but everybody would pay less income and sales tax. This would be possible because while some of the additional property taxes would stay within the municipality, the rest would get kicked up to the provincial government. The province could then cut income and sales taxes for everyone, provided of course that they treat it as a budget-neutral transfer, and don’t find new ways to spend the money.

What would be the outcomes if these changes were implemented?

In short, if you owned a moderate value home it would be a wash. If you owned a fancy home, you would lose, unless you make a really great income, in which case you’re back to a wash.

This is really a way to help renters. For example, under the current situation, if you’re a tech sector worker and you have a good salary but you’re really struggling to find a rental in Vancouver, even with your high salary, you’re thinking: “I’m paying really high income tax and really high rent, but my landlord is paying very little in property tax. If we switched that, I’d be better off.”

So by raising property taxes and lowering income and sales taxes, you could have a more dynamic economy. People recognize that unaffordability is currently hindering the economy, due to how hard it is to draw workers here to Vancouver who can’t be comfortably housed. But lowering income and sales taxes will also bolster the economy, because people will have more money to spend and more incentive to work and do business. It's this extra incentive due to lower income and sales tax rates that is behind the theoretical result.

What are the potential pitfalls?

Property tax reform is very controversial, politically.

Currently, we are seeing a lot of resistance to the additional school tax on high value homes, but this is quite spatially concentrated - for most people in B.C., a tax on $3 million properties has no adverse impacts, so it’s politically sellable, but for a certain segment of the population, it’s very unpopular.

But there is also a very important block of voters—people near or past retirement age, and home owners. For them, raising property taxes means less money in their pocket, it means the value of their property falls, and given where they are in life, they’ve already paid most of their income and sales taxes, so they would perceive this as very unfair to them. Politicians that hope to implement something like a budget-neutral transfer of property to income and sales taxes have to be very careful how they do it.

Thomas Davidoff is an Associate Professor in the Strategy and Business Economics Division and holds the Stanley Hamilton Professorship in Real Estate Finance at the UBC Sauder School of Business. His research paper “Policy Forum: Vancouver’s Property Taxes in Perspective” appears in the Canadian Tax Journal 2018, Volume 66, Issue 3.