People who believe that higher property taxes would improve the affordability of rental housing assume that vacant apartments are empty due to so-called speculative vacancies. However, the term “frictional vacancy” is also known in the specialist literature [the word ‘friction’ is primarily translated as “friction,” but economists also use it in the sense of “temporary,” editor's note].
Frictional, i.e., temporary vacancies arise, for example, when a tenant changes in a rental apartment. It can take several months for the owner of the apartment to find a suitable new tenant. In the meantime, the property stands empty. However, this is not a case of speculative vacancy, where the owner leaves the apartment empty with long-term intent.
A property developer may also be confronted with temporary vacancy caused by objective circumstances, as it naturally takes some time for all units in a newly completed building or a completely renovated older house to be occupied.
In practice, it is relatively difficult, if not impossible, to distinguish between the two reasons for vacancy (frictional vacancy can also arise from long-term illness, the death of the owner and subsequent inheritance proceedings, property disputes between heirs or co-owners). So if property tax is increased or a tax on vacant properties is introduced, both will be reflected in the amount of rent.
A property owner who normally rents out their property knows, for example, that it will be vacant from time to time anyway. This is the case, for example, until they find a suitable new tenant to replace the one who has already left the apartment. If a tax on vacant properties were introduced, the temporary vacancy period would become more expensive for such an owner. Until they find a new tenant for the apartment, they would have to pay more for it. To cover these increased rental costs, they would simply raise the rent.
A property developer will do something similar. They'll pass on the expected higher costs from the vacancy tax to the price of apartments sold in new buildings or renovated old buildings. This will accelerate the rise in real estate prices in the region concerned, which may also lead to a general increase in rents, as owners will try to pass on the higher real estate prices to tenants in order to maintain their existing rental yields.
The rise in rents described above, caused by the taxation of temporary vacancies, will be counteracted by the effect of growth in the supply of rental apartments. This will increase because a higher property tax or a new tax on vacant apartments will reduce the proportion of speculatively vacant apartments. Higher taxation of non-forced speculative vacancies will make them more expensive and thus naturally reduce their attractiveness in the eyes of property owners. The result will be a higher supply of rental apartments, which will increase pressure on rental prices.
However, this pressure on rents resulting from the increased cost of speculatively vacant apartments is counterbalanced by the aforementioned opposing pressure resulting from the increased cost of frictionally vacant apartments. In Vancouver, for example, where a tax on vacant properties was introduced a decade ago, empirical evidence shows that these two opposing effects more or less cancel each other out. The study concludes that the new tax does not increase the financial affordability of rental apartments.
A higher property tax or a new tax on vacant apartments increases the cost of voluntary vacancy rates, but logically also increases the cost of involuntary vacancy rates. They reduce the attractiveness of voluntary vacancy, which is the intended effect, but at the same time – which is not the intended effect – they increase the costs of forced vacancy, i.e., they increase the costs of normal business activities for property owners or developers.
These increased costs are ultimately passed on to tenants, thereby negating the positive effect that the increased cost of speculative vacancies has on tenants, i.e., the tax disadvantage of vacant apartments.
Even in other parts of the world, such as Vancouver, there is as yet no reliable empirical evidence that increasing property tax or introducing a tax on vacant properties would improve the financial affordability of housing.
The text was originally published on the website lukaskovanda.cz.