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Many Hawaii taxpayers breathed a sigh of relief after the state Supreme Court on Oct. 19 voided a ballot question that would’ve allowed the state to raise taxes on investment real property.

Supporters of the proposal had argued that higher taxes could be the key to making housing in the islands more affordable. They claimed to have evidence, but a look behind the curtain shows that isn’t so.

Lawrence Boyd, an economist at University of Hawaii-West Oahu, for example, wrote that “a substantial body of research indicates that higher property taxes reduce home prices.”

In fact, it is not clear that there is a “substantial body of research” to that effect, but more important, “indicates” is not the same as “proves.” Moreover, reducing prices is not the same as slowing the rate of price increases, and the studies cited by Boyd suggested both.

In an interview with Hawaii Public Radio, Boyd cited a Washington Post article that cited a study by ATTOM Data Solutions, which concluded that housing costs appreciated less quickly in states with lower property taxes, and vice versa. This clearly is not about reducing home prices.

He also referred to a study about home prices in Vancouver, Canada, which temporarily declined in the wake of a tax aimed at foreign buyers — before returning to double-digit increases. In both cases, the studies established only correlation, not causation.

In other words, the studies did not show that lower property taxes cause higher housing prices, nor that higher property taxes dampen them. There likely are other reasons that housing costs are higher in areas that happen to have lower property taxes.

For example, the ATTOM study didn’t account for the fact that many areas in the U.S. with high housing costs — such as Hawaii, California, Oregon and Washington — also happen to have many land-use restrictions, which restrict housing supply and lead to higher housing prices. Conversely, many areas with higher property tax rates and lower home prices — such as Texas, Wisconsin, Iowa and Michigan — have relatively few land-use restrictions.

Since the ATTOM study did not take into account the effects of land-use regulations, it should not be used to show that “higher property taxes reduce home prices.”

Another fact to consider: Many homeowners in states with high property taxes actually pay lower than average property taxes overall, and vice versa.

As noted by MotleyFool.com:

Though Hawaii has the lowest tax rate in the country, it also has the highest median home value ($504,500) by far. Delaware … has a property tax rate that’s almost twice as big as Hawaii’s, but a median home value of just $232,900. This means that if you own a home worth $504,500 in Hawaii, you’ll pay $1,412 a year in property taxes. But if you own a home worth $232,900 in Delaware, you’ll pay $1,234 in taxes annually.

On average, Honolulu residents pay $3,012 in property taxes each year, which is close to the national average of $3,399.

Also supporting higher property taxes in Hawaii as a way to lower home prices was a group calling itself the Hawaii Scholars for Education and Social Justice. In a report it issued in October, the group called it a “misconception” that “higher property taxes will adversely affect Hawai‘i’s economy and local people’s lifestyles” (page 5). It cited a 2017 study by the Hawaii Department of Business, Economic Development and Tourism (DBDET) that cited (page 37) a 2016 article from CNBC, which talked about how Vancouver was imposing a 15 percent tax on “wealthy foreign buyers” in an attempt to give its residents “a larger cut from the real estate shopping spree that’s taking place in their city, courtesy of wealthy overseas buyers that are snatching up property there.”

It does appear that sales dipped immediately following imposition of the tax. But prices peaked in the months leading up to the creation of the tax, perhaps from buyers attempting to nab property before the tax went into effect.

However, the tax seemed to cause a dip in prices for only detached houses, not for condos and townhouses, as noted recently by The Globe and Mail:

“The implementation of the foreign-buyers tax in August, 2016, helped end the boom in detached housing, but prices for starter condos haven’t been deeply discounted during the lingering crisis over affordability, said Steve Saretsky, a real estate agent who also writes a housing newsletter.

“Over the past two years, Vancouver condo prices jumped 13.9 per cent on average while townhouse prices rose 6.5 per cent, according to his analysis. The price for condos sold within Vancouver averaged $857,503 in June, compared with $753,065 in the same month in 2016, while the average price for townhouses climbed to $1,162,466 from $1,091,106 over the two-year period.

“By contrast, the price for detached houses sold in Vancouver in June averaged $2,550,708, down 12 per cent from $2,899,698 in the same month in 2016.”

The DBEDT study (page 37) also stated that similar policies were enacted in Hong Kong and Singapore, both in the early 2000s, but it is unclear whether this had the effect of reducing or dampening home prices.

In 2012, Hong Kong imposed a 15 percent tax on property purchased by foreign buyers, but home prices have gone up by 65 percent from 112 index points to 185 index points since then.

This is likely due to the fact that only 3.7 percent of the land in the Chinese special administrative region is allocated to urban housing, resulting in an average of about only 20,000 new units per year.

That’s similar to Hawaii’s land-use restrictions, which restrict development to just 4.8 percent of all land in the state, leading to an average of only 3,196 new housing units being built per year since 2007.

Singapore seems to serve as the best case study supporting the notion that higher taxes can help soften home prices, although the evidence is not overwhelming.

In December 2011, Singapore stuck foreign buyers of property with a 10 percent tax, and prices have gone up by about 2 percent overall since then, although prices did fluctuate during that time, and that tax has gradually risen to 20 percent as of July 2018.

The best that can be said about the notion that “higher taxes reduce home prices” is that there does not seem to be convincing evidence from the research provided so far to support that claim. That was the finding back in 2000 of Jeffrey P. Guilfoyle, then-director of the Michigan Department of Treasury’s Office of Revenue and Tax Analysis, who examined “the theoretical and empirical economic literature of the effects of property taxes on the price of residential housing” — and that seems to still be the case.

Common sense, however, does tell us that a high tax is likely be passed on to the buyer of a property, especially in the current seller’s market, as pointed out this past August by Tom Yamachika, president of the Tax Foundation of Hawaii.

“The buyer’s cost would not go down, and it could increase up to the amount of the tax,” he said.

Aside from dickering with tax policy, probably a better way to make homes more affordable is to simply open up more land area for housing, which would help lower building costs and perhaps lead to lower prices.

When all forms of taxation are combined, Hawaii already has the second highest tax burden out of any state. In attempting to reduce housing costs, policy makers should avoid creating new taxes and simply allow more houses to be built — so more local teachers, and everyone else, can afford to own a home in the islands.