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.
A 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.
That is not a fair assessment of the situation. There are a number of factors that have been put in place by the populace and government agencies to force this situation in the bay area:
1. Rent Control: This forces an incentive not to move. If you are in the 4-bedroom house at $1,500 a month for the past 15 years, a comparable 4-bedroom house is now $6,000. There is no incentive to move and owner's have little incentive to bring up to standard something they are not going to get an ROI on. In this instance, Prop 13 actually makes the situation bearable for the landlords, think if the costs went up and your return stayed static.
2. Building Restrictions: Between the historical board, local populace anger to building, and zoning enforcement, the bay area's supply has been static while demand has increased. There are workarounds, but they border on illegal (i.e. the guy who turned a storage closet into a baby's room for additional space); essentially sub-dividing up existing property.
Within the Bay area, the ability to move a demand curve down has not existed, so the prices have risen to meet the existing supply. Prop 13 has no direct effect on these two items except a positive effect for the landowners in reducing the tax burden that would have forced early bankruptcy for them because of the rent control.
If you think of the government as the "ultimate landlord", then property tax is just another form of rent and Prop 13 is just another form of rent control. It has most of the same positives and negatives as rent control:
> forces an incentive not to move
Check, if you move your property tax will go up
> and owner's have little incentive to bring up to standard something they are not going to get an ROI on
Check, the "landlord" (government) spending on residential infrastructure won't result in increased property tax income. This is partly why the peninsula cities invest so much in office space but refuse to build housing.
You're right that Prop 13 makes rent control possible, but overall I'm not sure that's a good thing.
<You're right that Prop 13 makes rent control possible>
Completely false; the Jarvis-Gann Amendment ("Prop 13") has nothing to do with rent control.
You may intend to instead argue that both JGA and rent control provide disincentives to move (and I would not disagree), but that's a different statement.
You're being down-voted because Klipt is agreeing with GP that by holding down the costs of property owners Prop 13 makes the holding down of property revenues by rent control more tolerable for the owner.
No, I'm being downvoted as a protest proxy against Prop 13, which I didn't advocate or defend -- I just tried to clarify the history. (I wasn't even of voting age when it passed.)
Rent control existed in many CA cities well before Prop 13 and is orthogonal. The impetus for Prop 13 was that frequent and growing property tax rate (as well as assessment) increases during Willie Brown's control of the Assembly, combined with high mortgage interest rates, were driving longtime residents (especially seniors and others on fixed incomes) out of their homes.
Most rental property owners are not lifelong, continuous owners that benefit significantly from Prop 13, and I guarantee you that those who are aren't giving any rent "discounts" because of Prop 13 savings -- the market (and law) sets the rents.
Those 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.
Not necessarily. I've been seeing several ex-rental units which have recently been passed down as part of an estate.
Inheriting a house doesn't result in a valuation event, and the seller has nothing encouraging them to sell. So, the house sits there empty - They're only paying $100/month in taxes, which is coffee money.
The combination of no capital gains on inheritance, no estate taxes and ancient property valuations creates a multi-generational issue where houses are kept locked up.
The 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.
> 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.
Well sort of. Consider a couple in a 4 bedroom house who's kids have moved out, but don't move into a smaller place (say 2 bedroom condo) because they would have to pay a bigger tax bill. So there are two bedrooms not being used because of taxes.
> Consider a couple in a 4 bedroom house who's kids have moved out, but don't move into a smaller place (say 2 bedroom condo)
This would theoretically deal with the problem of having young couples with many children who can only afford to live in a 2-bedroom condo, because all the bigger housing is occupied by old people with empty nests and the only new housing is 2-bedroom condos or smaller. But, if you're not interested in forcing the old people to leave, it doesn't solve the problem of housing supply -- you'll still need some housing for the old couple and some more, separate, housing for the new large family, and if you don't build additional housing to accommodate the incoming people you'll end up with a housing shortage, regardless of whether old people shift from their existing homes into smaller ones or not. As long as you're building housing for the people who move in, you might as well build it in the sizes they demand.
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".
Just 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.
That'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.
In 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).
> 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.
>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.
While 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.
You say that's how other markets work, but I can't think of any other market where an increase in the price of something you already own can make owning it unaffordable. If I buy stocks, or gold, or a car, and it gets more valuable, I'm not taxed until I sell, right? Does the same argument hold for those?
I'm referring to other real estate markets in the country.
Also, in this case, if the price of your home appreciates, it is likely the price of other homes appreciated, so your gain may not actually amount to anything (particularly after realtor fees). Likewise, you are taxed every year on real estate.
>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.
What you're leaving out of the equation though is that often times people that old who have lived here forever either have their home fully or mostly paid off. Sure it likely appreciated quite a bit, but depending on their savings, they may not be able to afford a new home in the area at market rates regardless of the tax situation, especially if they are retired and on fixed income. So instead they stay in their home and don't sell. Or they pass it on to the next generation who doesn't sell.
Eh, why would they not be able to afford a new home after selling the old one? Usually when people retire they're looking for a smaller home that's easier to take care of.
How does Prop 13 work? The people who wrote that paper are saying that it is a subsidy; absolutely not. The tax rate is frozen, so as I understand it, the person simply pays a lower rate, it is not a system where a tax is paid and then has it refunded to them.
I am going to be highly critical of an economic research paper that looks at a tax as a subsidy, so here we go:
1. A tax rate lower because of a law than your neighbor is not a subsidy. A child deduction on an IRS form is not a subsidy.
2. The average length of stay for a home owner was increased by .11 years for Bakersfield, 2 years for Los Angeles, and 3 or more year for the Bay Area. Bakersfield, as far as I know, has no rent control, so there is an argument that this is essentially a rounding error. Los Angeles and the Bay Area are rent control cities, no where in the paper is this brought up as an externality forcing the longer periods of tenure ownership.
3. Table 1A shows that rental tenure increased from 4.30 to 5.25 years from 1970 to 2000, this is essentially the same increase as that of 10.76 years to 13.42 years for the home owners; 24.7% for the home owners and 22.1% for the renters. This should invalidate pointing to Prop 13 as the reason for longer owner stays.
4. Florida and Texas pass the same law and the paper simply says, forget them. The two states, Florida and Texas, go on to show that there is no impact from Prop 13, thus further invalidating their study.
5. Not one mention of rent control being a reason why people may not want to move out of their existing dwelling and purchase a home.
This may be a good paper to reference as a point, it is a horrible paper by ignoring externalities, comparable examples, and not examining differences between areas (Bakersfield vs. Los Angeles vs. San Francisco).
No 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.
Real 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.
I 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.
> 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.
> 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.
Corporations 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.
Yes, 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.
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.