President’s Message – July 2021
Many jurisdictions around the world use, or are considering using, property taxes as a means of limiting the rise in house prices that has been experienced during the COVID-19 pandemic. It is generally assumed that the recent dramatic increase in house prices has been fuelled by a combination of record low interest rates, an increase in demand – particularly from those now working at home – and a shortage in supply.
A recent article titled “Why using property taxes to control increases in housing prices is a bad idea” sets out the case for not going down the route of taxing properties in order to try and limit price increases. The authors say growing concerns about housing affordability have some advocates urging municipal governments to increase residential property tax rates as a way to moderate ever-increasing home prices, which continue to rise even when transaction volumes are moderate.
Using Canada as an example, they say that prices have steadily risen since last summer and various governments have come under increasing pressure to address housing affordability issues. The Office of the Superintendent of Financial Institutions (OSFI) responded by tightening mortgage regulations, which now require borrowers with uninsured mortgages to qualify at a mortgage rate of either 5.25 per cent or two percentage points above the mortgage contract rate, whichever is higher.
The authors say that the effectiveness of such tightening will not be known for a few months. But if previous experience is any guide, they consider it will essentially have a short-term impact: average residential housing prices will stop appreciating, perhaps even decline at times, for a few months, followed by sustained price increase in the long run, provided other market fundamentals do not change.
Furthermore, they say, some housing experts believe that tighter mortgage regulations could hurt affordability for first-time homebuyers, who, unlike repeat purchasers, do not have access to any home equity to make subsequent purchases. The authors say they have repeatedly argued that supply-side solutions facilitating a sizeable increase in housing construction of diverse types that reflect consumer demand is the most likely intervention to improve housing affordability.
They say that demand-side solutions, often in the form of tighter regulations and newer or higher taxes, do not address the underlying cause of worsening housing affordability, which is that demand for housing exceeds supply, especially in fast-growing jurisdictions. The suggestion to increase property tax rates is one such demand-side intervention that, they say, some think might put the housing genie back into the affordability bottle.
The authors go on to say that there is evidence of a negative correlation between higher property taxes and housing prices. They refer to an article concerning house prices in Savannah, Georgia where it was observed that “property taxes are capitalized into real housing prices” such that prices of single-family houses were negatively impacted by higher property taxes. They also point to a recent analysis of the impact of property taxes on house prices in 34 countries by the Organisation for Economic Co-operation and Development (OECD) which, they say, also found “a strong negative relationship between increases in immovable property tax revenues and house prices.”
Interestingly, the authors suggest that the relationship does not seem to hold in reverse. Researchers from Uppsala University in Sweden found that a nationwide decline in property taxes did not significantly impact residential property values. The authors recorded “price increases only in a small segment of the market containing properties with very high tax values.”
The articles goes on to say that any correlation between higher property tax rates and lower property values does not necessarily imply that increasing the millage rate will cause residential property values to decline. Furthermore, such a move could have unintended consequences, so municipal regulators would be wise, they say, to review the seminal work by American economist Charles Tiebout before making any decisions. Tiebout suggested that if taxpayers are not pleased with higher local taxes or inferior services, they might relocate to neighbouring municipalities with lower taxes and better services.
The authors continue, property taxes are imposed by municipal governments whose jurisdictional boundaries are limited. An isolated move by one municipality to raise property tax rates will only enhance the relative attractiveness of neighbouring municipalities with lower property tax rates. They reference that when the City of Toronto introduced a Municipal Land Transfer Tax in February 2008, the share of dwellings sold in neighbouring municipalities increased accordingly, providing evidence that people vote with their feet and relocate to jurisdictions with lower taxes or better services.
They also consider that an increase in property tax rates is also likely to hurt housing prospects for renters, who are the most vulnerable on the affordability spectrum. Since an increase in property tax rates also increases the cost of ownership, landlords – over time – will pass the higher costs on to the renters. They reference some earlier research which investigated the impact of property taxes on residential rents. That research found that “a one standard deviation increase in the property tax rate raises residential rents by roughly $400 annually.”
But that’s not all the authors’ state. They say calls to increase property tax rates ignore the obvious political pitfalls in its implementation. Consider that funds raised from property taxes support explicitly identified services exclusively at the local level. These funds are never used to cross-subsidize taxpayers in another municipality. An increase in property tax rates not intended to improve services for taxpayers, but to lower the valuation of their most valuable asset, is unlikely to win endorsement at the ballot box. They conclude that improving housing affordability is a formidable challenge that municipal governments are unlikely to cope with on their own. Among other measures, municipal governments must explore ways to expedite new housing construction to cope with housing demand.
I think this is an interesting article, but readers will have their own views about whether it is right!
Moving on to IPTI business, we have had another busy month in June with major online events and work continuing on a variety of interesting projects. We have also recently started work on a number of new projects which indicate that the world of property taxes never stands still!
At the beginning of June IPTI held its annual Mass Appraisal Valuation Symposium (MAVS). The MAVS, titled “Mass Appraisal – Challenges, Solutions and Experience Sharing”, was originally scheduled to be held as an in-person symposium in Calgary, Alberta but, due the restrictions put in place to limit the spread of COVID-19, we decided to convert this into an online event. Held over 2 days (3-4 June), we had a great line up of speakers who covered a wide range of topics. Space does not permit a detailed commentary on all the subjects considered, but they included “Mass Appraisal Valuation – Concepts and Applications”; “Declining Markets: Mass Appraisal Applications in Turbulent Times”; “International Experience – Brazil, Latin America, The Netherlands, Australia and New Zealand, North America”; “Applying Machine Learning for Valuation”; and “The Future of Mass Appraisal”.
IPTI is very grateful to all those who spoke at the symposium and chaired the various sessions. We are also grateful to those who kindly sponsored the event and supported it as cooperating agencies. Feedback confirms that the large number of attendees found it interesting and informative and that was certainly my view. We look forward to being able to hold our next MAVS as an in-person event next year. More details on that in due course.
Also during June, we held the second in our two-part series of webinars on the topic of “Assessment Appeal Preparation”. This webinar – Module 2 – was another in the series we deliver in partnership with the Institute of Municipal Assessors (IMA). The webinar addressed the issues and procedures associated with assessment review courts, tribunals and boards. Our experienced speakers – all legal practitioners – dealt with a variety of aspects concerning litigation and dispute resolution including mediation, settlement conferences and hearing-related practices. They covered details such as opening statements, direct evidence, examination, cross-examination and closing arguments. The focus of the webinar was on the practical steps and conduct required to participate in a professional manner at mediations, settlement conferences and hearings. The webinar was well-received by those participating.
Looking ahead, we have a number of other interesting events coming up details of which are, as usual, available on our website: www.ipti.org
One future event I would like to mention is the (new) Conference of Valuation Agencies (CoVA) that IPTI will be facilitating on 7-9 December. More information about that virtual event will be available soon.
I would also like to draw your attention to the Journal of Property Tax Assessment & Administration. The Journal is a joint IAAO-IPTI publication and the latest edition was released in June. It contains a number of interesting articles including one on data quality, another on the social benefits of neighborhood redevelopment and, of particular topical interest, one titled “Property Tax Assessments, Collections, and Revenue Performance in Economic Downturns: An Examination of Large American Cities”.
Now it’s time for a quick look at what is making headlines concerning property taxes in selected jurisdictions and countries around the world.
In British Columbia, it is reported that a homeowner’s court challenge threatens to “open floodgates” to assessment appeals as the Judge ruled that the appeal board failed to consider an allegation of “institutional bias”. The B.C. Supreme Court judge found that the Property Assessment Review Panel (PARP) failed to give a fair hearing to a property owner who asked the members of the panel to recuse themselves because they were paid through taxes levied according to the same property values they were tasked with deciding. Lawyers for B.C.’s Attorney General appeared at the hearing alongside lawyers for the review panel and B.C. Assessment because the case is the first judicial review of a panel decision. The province claimed the case could threaten the streamlined process written into law to handle thousands of B.C. property assessment appeals each year. But the judge said procedural fairness had to come first. She said, “I appreciate that the PARP operates under significant time constraints, and must process a large number of appeals in a short period of time. However, those constraints do not eliminate the PARP’s obligation to provide the property owners appearing before it with a fair hearing.” The news report states that the decision constitutes a fundamental challenge to the work of an agency [BC Assessment] whose annual valuations have become a reflection of the province’s over-heated real-estate estate market. It explains that taxpayers have until January 31 to file appeals with the Property Appeal Review Panel which then has until March 16 to adjudicate all the decisions. Taxpayers who are not happy with an outcome then have until April 30 to file a challenge to the Property Assessment Appeal Board, which, like the Property Assessment Review Panel, is considered to be an independent tribunal. B.C. Assessment told the court that between 22,000 and 32,000 appeals have been filed with the review panel in the past five years. Hearings typically last 30 minutes, including eight minutes for the complainant, eight minutes for B.C. Assessment to respond, six minutes for questions and deliberation and four minutes to deliver the decision. According to court filings, the taxpayer in this case spent eight minutes arguing that the panel was institutionally biased and should disqualify itself because “all panel members are remunerated, based on the tax levies, that are set in relation to the assessments issued by B.C. Assessment.”
Apparently, at the 18-minute mark, the panel said they didn’t think they could deal with the challenge, but effectively offered to kick it up to the appeal board. The taxpayer said he wanted to proceed with the hearing, but asked whether he could cross-examine the assessor. The chair of the panel wouldn’t let him. The hearing wrapped in 38 minutes with the panel confirming the latest $4.8 million property assessment. The province argued that the homeowner should have taken the case to the second level of challenge – the appeal board – before going to court. But the judge said the appeal board doesn’t have the mandate to consider questions of institutional bias. The judge said the review panel should have considered the bias application. The judge said the panel compounded its error by seemingly holding it against the taxpayer for using his allotted time for presenting evidence to argue about bias. “Holding parties to reasonable time limits is not inherently unfair,” she said. “But in a situation such as this, where a party brings a procedural application which takes a few minutes, the PARP must be prepared to still give that party sufficient time to present its evidence.” The B.C. Supreme Court ruling would normally result in a new hearing, but the tight deadlines – mandated by law – make that impossible because the dates for holding review panel hearings in 2021 have already come and gone. The taxpayer said he would be happy instead with a declaration of procedural unfairness that could serve as a guide to the panel in the future.
I have provided more detail about this case than normal in this newsletter as it is of particular interest.
In Greece, the taxable value of Greek citizens’ real estate property is set to rise by at least 100 billion euros next year, topping €700 billion in total. The inclusion of about 3,500 regions to the system of automatic calculations of property prices used for tax purposes (known as “objective values”) will mean coverage of about 98% of the population, followed by the remaining 2% later in 2022. That will be the first time the Single Property Tax (ENFIA) will be imposed on such an expanded tax base. Based on the current ENFIA calculation rates, individual owners and companies would have to pay an additional €3 billion in main and supplementary property taxes. However, as the collection target for next year will remain at around €2.6 billion, the Finance Ministry will have six months to decide which way it will redistribute the tax load of €350-400 million. The ministry will use the modification of the ENFIA calculation rates, the change to the calculation brackets for the supplementary tax (imposed on large ownerships) and the adjustment of the discount rates introduced in 2019, so as to allow a fairer distribution of the tax burden on owners. Millions of taxpayers, and even property owners in areas where zone rates will go up 10%-20%, will be asked to pay less for their ENFIA in 2022. On the other hand, owners in areas where the objective values will increase considerably (the list will introduce hikes up to 40%) will have to pay more in 2022 than this and last year. The valuation of Greeks’ real estate assets will be carried out on the basis of the new objective values the independent Authority for Public Revenue has yet to publish.
It seems as though the USA is unhappy with Canada over property taxes, in particular, the Canadian government’s proposed vacant home tax for foreigners. A member of the U.S. House of Representatives Committee on Ways and Means is threatening retaliatory taxes if U.S. citizens aren’t spared from paying the foreign-owned vacant homes tax proposed by the Canadian government. It is reported that thousands of U.S. citizens own real estate in Canada and many of those properties are cottages or vacation homes. But the closing of the U.S.-Canada border during the COVID-19 pandemic has prevented many Americans from visiting and maintaining their Canadian properties for more than a year now. Now they are worried that Ottawa will unfairly label them as absentee property owners and set them up for a big tax bill. The proposed 1 percent annual tax on the value of foreign-owned residential real estate will apply to properties that are considered “vacant or underused.” It is scheduled to take effect on January 1, 2022, according to the federal budget. It’s said to be unclear at this stage how the Canadian government will deem a property to be unoccupied or how the tax will be enforced. A forthcoming consultation will offer more details about the levy’s parameters, its implementation and determine how it might apply in smaller, resort and tourism communities. Americans have already made it clear that if they are not exempted from paying the proposed levy, they will urge Congress to impose a retaliatory tax on “snowbirds” and other Canadians who own property in the United States. It’s not known exactly how many snowbirds are property owners south of the border, but up to 375,000 Canadians typically spent winter months in the United States and Mexico prior to the pandemic, according to a 2019 report from Statistics Canada. Foreign buyer taxes are already in place in parts of British Columbia and Ontario and those measures, commentators say, have done little to cool housing prices. They also say it’s not clear why a federal tax would lead to a different result. Many support the idea of going after professional speculators, both foreign and domestic, who use Canadian homes as passive investment vehicles, price local families out of the market and allow those vacant properties to become eyesores in communities. But, they say, it’s illogical to blame American cottagers for the current increase in Canadian housing prices. They say that the federal government should be preparing to welcome them back, not chasing them away.
In Australia, an MP has criticised his own government for failing to properly capture the windfall profits flowing to developers around major infrastructure projects warning that, without a new policy, future generations will be left with ever-growing budget debt. The NSW MP, who is chair of the House of Representatives Infrastructure and Transport committee, said the federal budget would suffer ongoing budget problems if the government ignored calls for a form of a windfall gains tax on major infrastructure works like Sydney’s Western Sydney airport. Windfall gains are those which normally accrue to landowners who own undeveloped property that grows sharply in value because of rezoning or nearby new infrastructure such as an airport or a railway station. In its recent state budget, the Victorian government revealed plans for a windfall gains tax of up to 50 per cent. It will apply to land that is rezoned. Infrastructure Australia and several parliamentary inquiries have backed forms of value capture or windfall gain taxes to help fund major infrastructure projects. The MP said the Victorian windfall tax was flawed because it was not directly linked to infrastructure, but it resulted from the federal government’s unwillingness to back proper reform to windfall gains. “This inefficient Victorian tax is a direct and inevitable result of federal inaction,” he said. “Taxes like Victoria’s are what you get when federal governments sit on their hands over this issue and refuse to consider a fairer federal version of it, one that can be applied broadly across Australia, and solely linked to infrastructure funding.”
In the UK, the government has announced yet another consultation exercise in relation to business rates (the annual property tax for commercial properties). The latest review relates to the frequency of revaluations and reiterates the government’s intention to move to three-yearly revaluations from the existing five-yearly cycle (which has recently been extended). However, the latest consultation paper proposes a number of associated reforms to support the use of more frequent revaluations including a duty to notify the VOA (the assessing agency) of changes to the occupier and property characteristics that affect liability for business rates; such information would be shared with local authorities. Ratepayers (taxpayers) would be required to access an online portal on an annual basis – aligned with business rates billing – to confirm that the data held for their property remains correct. It also proposes the mandatory provision of rent and lease information to the VOA, as well as trade and cost information used for valuation in appropriate cases. As with the duty to notify, the mandation of information requirement would also be included in an “annual confirmation” that ratepayers will have to provide. The UK Treasury previously published a call for evidence on the “Fundamental Review of Business Rates” in July 2020 and published the results of this call for evidence in an Interim Report in March 2021. The Final Report, setting out the government’s conclusions across the scope of the Review, is due to be published in Autumn 2021.
And finally, it is reported that a councilman in Memphis recently pushed hard for a higher property tax rate – an increase to $3 from the current $2.71 per $100 of assessed value. However, Memphis City Council voted down the proposed property tax increase as they said that, due to the pandemic, it was not the right time to talk about tax increases. It transpired that, after the vote, records showed that the councilman who had been pressing for the increase had not paid his own property taxes! Proof, if it was needed, that the best type of tax is one that someone else pays.
Paul Sanderson JP LLB (Hons) FRICS FIRRV
President, International Property Tax Institute
President’s Message 2021
President’s Message 2020
President’s Message 2019