The latest fashion in tax grabs is the vacant property tax (VPT). In Vancouver it’s called the “empty home tax.” In Toronto it’s the “vacant home tax.” Whatever the name, taxing residential property that isn’t used for a government-prescribed minimum number of days in a year is pernicious.

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Jack Mintz: Vacant home taxes may be worsening the housing crisis Back to video

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Toronto is tripling its version of the VPT to three per cent of the home’s assessed value. Residents must file by February 29th or pay a fee of $21.24 and possible penalty of $250. The idea is to free up vacant homes and land in high-priced housing markets. Some politicians believe underused property is a deadweight loss to an economy, helping ruthless speculators enrich themselves by flipping property.

That’s hogwash. Property is held vacant, often at a substantial economic cost, because people find it makes sense for them to do so. The short-run impact on housing availability is close to negligible, as I highlight below. In the long run, it could well lower the housing stock, since developers paying the tax on land inventory will be discouraged from investing in residential property. For such reasons, a paper for the New Zealand Productivity commission rejected having a VPT, which has not been adopted there.

In Canada, governments generally define “vacant” as used fewer than six months in a year. Other countries are more generous. French VPT does not apply if residential property is used for at least three months in a year, while Oakland, California, lets you off so long as your property is occupied 50 days a year.

Like Toronto’s, Vancouver’s VPT is assessed at three per cent of value. In addition, B.C.’s “Speculation and Vacancy Tax” is two per cent on property owned by foreign residents, though just 0.5 per cent on Canadian residents. The federal government, which really should leave property taxation to the municipal governments that depend on it almost exclusively, levies its “Underused Housing Tax” on foreigners at a rate of one per cent a year.

Thus, a Vancouver resident could pay 3.5 per cent in combined B.C. and city tax. On the median Vancouver home, value $1.2 million, that would be $42,000 per year. A foreign commuter working part-time for a Vancouver business could pay up to six per cent annually — three to the city, two to the province and one to the federal government — $72,000 at the median house value.

Of course, the tax is on top of the maintenance, insurance, depreciation, financing and municipal taxes that still have to be paid even when a property is vacant. For a Vancouverite living in the median-valued single home, that could be $99,600 a year. Add in the 3.5 per cent provincial and municipal VPT, and the cost zooms to $141,600. At the six per cent VPT rate, it becomes a head-spinning $171,600 — again: per year.

Who in their right mind would develop residential property given the time it takes to assemble land, build or renovate homes and find buyers? Some economists have argued — erroneously — that investors hold empty homes in hot markets so they can earn fat capital gains on flipped property. But in Vancouver the average annual capital gain on housing over the past decade was just 5.3 per cent, which is about half the all-in carrying costs per year.

It used to be said people’s homes were their castles. There are all sorts of perfectly reasonable motives for holding a property vacant. Matching buyers and sellers on housing markets takes time — some may have to move before the sale is completed. Many people buy cottages as second homes but use them fewer than six months a year. (Not all cottages are winterized!) Homeowners can fall ill for a long time or even, alas, die. Extensive renovations take time, requiring families to move out for more than six months. People who work only part-time in a city may need a place to keep their personal effects. Developers may hold land and build homes for years before ultimately finding buyers. Houses become dilapidated in areas with little demand and are abandoned. And so on.

If vacancy taxes can be costly for taxpayers, they’re also costly for governments to collect. All residents have to report that their property is being used though 99 per cent won’t pay the tax. If they end up being audited, homeowners face onerous filing requirements to show their property has been in continuous use.

Have vacancy taxes had much impact on rental and housing prices? I calculate that in Vancouver vacancies fell by an almost imperceptible 0.19 per cent of the overall rental stock after the tax was introduced — although the pandemic and rising interest rates presumably played a role, too. As for affordability, the typical vacant property released to the market is more expensive than the median home. And earmarking VPT revenues for social housing is simply hokum. Money is fungible. Governments can move existing social housing funds to other priorities.

These days politicians everywhere are desperate to improve housing affordability. They may levy VPTs with the best of intentions but if, as seems likely, such taxes discourage long-run residential development, their effect will be the exact opposite of what their proponents intended.

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