Crank up New York real estate taxes
There are two reasons to own a house. The first one is to live in it. The second is to sell it later at a profit.
These two reasons have led to two different housing markets in New York City. The first one what we might call the affordable housing market, and it simply refers to normal people who need to live somewhere but don’t have extra millions of dollars to spend. The second one is the luxury real estate market of New York, which is exactly for people who have large pots of investment money.
Those two housing markets compete with each other, and lately the luxury market is entirely dominating. This is partly due to the large amount of foreign money being laundered and funneled into real estate. (Update: the U.S. Treasury has said it will look into this, but some people are already claiming it won’t be enough.) It’s also partly due to general global inequality, which produces quite a few millionaires.
Finally, it’s partly due to the bizarre constellation of tax breaks we give new developments, even if only temporarily. It makes holding on to apartments relatively frictionless, even if they are empty, which many of them are. On a permanent basis owners of luxury apartments pay a tiny fraction of the real estate tax that other New Yorkers do relative to the sale price of their apartment (h/t Nathan Newman).
And that’s where we come to the problem. The people who want to live in New York are being shut out by the people who want to own apartment-shaped assets.
If you were a developer, looking for your next building project, you might succumb. Given the expense of land, it makes sense to maximize your profits and build 3- or 4-bedroom apartments that will be snatched up by Russian oligarchs rather than a large number of studios that will actually be lived in. It just makes you more money.
What should we do? Well, we could do nothing. In the long run we might have a city that consists of mostly empty apartments.
Or, we could decide that people should actually live here. In that case we should increase real estate taxes until things change.
Right now we create the exact wrong incentives. First, because non-residents don’t pay city income taxes, and second because we often delay taxes on new apartments and make taxes too low overall. If you think about that, we are actually setting up incentives for the situation we have: empty luxury apartments.
Instead we should make sure that luxury apartments pay more than their fair share of taxes, instead of less, and especially when they’re empty. Don’t worry, the billionaire owners can afford it, and if they can’t, then they can sell it to a mere millionaire who lives in Park Slope.
You see, if an apartment – especially an empty apartment – actually costs the owner a lot of money, they’d sell it, and they’d sell it to a person that would actually live there. That would bring prices down on those assets, because the rich people could simply shift their interest to the fine art market or some other place where holding assets doesn’t cost as much.
Finally, if real estate taxes went up, people might worry that their rent would go up too. But if the market as a whole became a market for normal people, instead of just for rich foreigners, the overall costs would become more reasonable, not less.