‘Empty homes’ tax won’t fix supply-side housing crisis

from Grassroot Institute, May 30, 2023

The idea of taxing so-called empty homes has gained currency in recent years among state and county lawmakers. But what is the evidence that such a tax can really work? 

On the latest episode of “Hawaii Together,” guest Jensen Ahokovi told host Keli‘i Akina, president of the Grassroot Institute of Hawaii, that the answer depends on the goals that were set for the tax.

Ahokovi is co-author with Mark Coleman of a new Grassroot Institute of Hawaii study titled, “The ‘Empty Homes’ Theory of Hawaii Housing Crisis,” which looked at census data from all 50 states and the District of Columbia and found no correlation between vacancies and housing prices.

In other words, an empty homes tax is extremely unlikely to increase housing supply or bring down housing prices.

However, said Ahokovi, a Grassroot Institute research associate, if the goal is to reduce rental vacancies, there is tenuous evidence that an empty homes tax could have some effect. And if the goal is to generate tax revenues, then it definitely could work, because “it is a tax after all, and people [would] have to pay the tax if they have a vacant property.”

Ultimately, said Ahokovi, the “empty homes” theory is just another distraction from the real cause of Hawaii’s housing crisis, which is regulations that block homebuilding.

“The laws of supply and demand do not discriminate. The laws of supply and demand apply whether or not you exist on the U.S. mainland, and they apply whether or not you exist in the middle of the Pacific Ocean,” Ahokovi said. “The clearest solution for Hawaii’s housing crisis is to build more homes. And I don’t think that it gets any simpler than that.”

TRANSCRIPT

5-23-23 Jensen Ahokovi with “Hawaii Together” host Keli‘i Akina

Keli’i Akina: Aloha, everyone, and welcome to “Hawaii Together” on ThinkTech Hawaii. I’m Keli’i Akina, your host and president of the Grassroot Institute of Hawaii. 

You know, it’s become common practice here in Hawaii to blame scapegoats for the state’s disastrous housing crisis, the lack of housing and the high prices. And whether these scapegoats are foreign or mainland buyers, short-term vacation homeowners, or so-called owners of empty homes, the research doesn’t necessarily support the accusation.

Now, of course, the real cause is simply too many barriers in the way of new home building, as virtually all in-depth studies have shown that that’s really the problem behind our scarcity of housing and its high cost. 

Nevertheless, mistaken notions about how to solve Hawaii’s housing crisis persist. And on this show, we’re going to take a look at that issue with respect to vacant homes. 

Just last week my team at the Grassroot Institute released a new report titled, “The ‘Empty Homes’ Theory of Hawaii Housing Crisis,” and that’s the topic of today’s show.

[music]

Akina: Well, today I’m pleased to be joined by Jensen Ahokovi, who is a research associate at the Grassroot Institute. He’s done some great work so far. He also wrote the Institute’s groundbreaking report about the “outsider theory“ of Hawaii housing, which we issued last year. But recently, he has been the chief author of a report that we’ve released talking about the situation of vacant homes in Hawaii. 

Welcome to the program, Jensen.

Jensen Ahokovi: Thanks for having me. Good to be back.

Akina: Well, you’re doing great work, and I want to jump right into the topic today. 

You know, as I’m sure almost everyone in Hawaii knows, our islands have some of the highest home prices in the nation, if not the highest. And many proposals have been put forth at the state and county level to address this. 

 Now, one of the proposals that has been put forth is to impose a tax on so-called empty homes. Before we dive into analyzing that, let’s get our definitions right. What exactly do we mean by an empty home? And why in the world are people thinking of taxing them?

Ahokovi: Yeah, so an empty home, you know, you would think the definition is pretty intuitive, it should be in the name. But it turns out that the definition is quite ambiguous. 

So, for example, in France, a vacant unit is legally defined as one that is unoccupied for at least a year. In Oakland, California, any unit that is used less than 50 days out of the year is considered vacant. In Washington, D.C., a vacant unit is one that is unoccupied for 30 days or more. And in Honolulu’s Bill 9, which has been talked about recently, and in Vancouver, Canada’s current vacancy tax that they have, they define vacancies as any unit unoccupied for more than six months.

Now, as to why people think they need to be taxed, well, some people think that vacancies are a signal of an inefficient housing market. That if there is a lot of underutilized housing in a market, that means that the market is unhealthy, and that they need to encourage people to lease out or rent those units out to tenants to resolve things like housing shortages and high prices.

Akina: Well, Jensen, you co-wrote the Grassroot report with Mark Coleman, our editor-in-chief. And in it, there are at least three or four specific reasons that are offered as to why people are calling for a tax on empty homes. You want to go through those a little bit, explain the rationale that supporters are giving?

Ahokovi: Yeah, sure. Yeah. So you’re correct, there are about, you know, three or four goals that some people outlined. Some of them include increasing the housing supply which is similar to also wanting to reduce vacancies. And the logic behind that is that a vacancy tax will encourage vacant property owners to sell or rent their properties to tenants. 

Another goal would be to increase affordability. And this might be achieved, for instance, if the vacancy tax does end up increasing occupancies. 

And the other obvious goal is really just to raise revenue. It is a tax after all and people have to pay the tax if they have a vacant property, so there will be some money earned by the local government.

Akina: But, Jensen, let’s try to get a little bit of perspective on this. Exactly how many vacant homes are we talking about here in the state of Hawaii?

Ahokovi: Yeah, so in 2020, Hawaii’s vacancy rate was about 14.4%, which is the ratio of vacant units to the total housing stock in the state. And that translates to about 78,000 vacant units. 

Now, that does sound like a lot — 78,000 is a non-trivial number. But if we look across the country, you might expect for Hawaii to be near the top in terms of vacancies, at least given the rhetoric that some people have said about the issue. But if you look at the data, it turns out that Hawaii is actually just about in the middle of the nation in terms of vacancy rates, so it’s not like we’re some crazy outlier in terms of empty homes.

Akina: Well, let’s go to some broad strokes right now. What are some of the major findings of the research that you and Mark have just completed? Specifically, would an empty or vacant home tax be successful? Would it produce the kind of results that people really want to see?

Ahokovi: Yeah. So, first, what we do in the report is we wanted to understand what the nature of the relationship is between vacancies and housing prices in Hawaii. So we looked at neighborhood-level data from the U.S. Census Bureau’s American Community Surveys between the years 2010 to 2019. 

What this does is it allows us to apply some pretty useful statistical techniques to measure how the number of vacancies has changed over time in relation to housing prices in Hawaii. 

And we found that vacancies appear to be largely uncorrelated with local housing prices. And this is even after accounting for the fact that neighborhoods have differences in socioeconomic status and geography. And so, that finding alone suggests that a vacancy tax wouldn’t really do much to increase affordability. 

But again, we also look at the various goals of a vacancy tax because, after all, the success of the tax really pretty much depends on what the framework of success that the lawmakers have. 

Lawmakers will surely earn some revenue from the tax, so that goes towards the idea that the tax will raise revenue. But if they want to increase affordability, like I just said, that likely won’t happen to any meaningful degree.

If they want to reduce vacancies, that actually might happen. But remember, a reduction in vacancies doesn’t actually mean that there’s an increase in the housing supply. And that’s simply because the housing supply or the total number of units in Hawaii would remain the same. 

What changes is that the tax merely shifts the utilization of existing units into occupied units. And that’s an important nuance because Hawaii’s housing crisis is not caused by the underutilization of the existing housing stock, but rather because there is insufficient production of new housing.

Akina: Well, that’s an important point to recognize, that we’re really dealing with the supply of housing, and the solution has to do with increasing that supply, as we have said many times. 

Now, in your research, what about some of the cities that already have an empty homes tax in the United States or even elsewhere? Tell me a little bit about that. How many are there out there? Has the tax worked for them? And, again, I suppose that would be depending upon the specific goals, as you point out, that they have.

Ahokovi: Yeah. So it turns out there aren’t too many. So in the U.S., there are really only a few cities that have them. I mentioned Washington, D.C. earlier, Oakland, California, and most recently San Francisco and Berkeley, also cities in California. 

Internationally, Vancouver in Canada is well known for its vacancy tax. as I also mentioned previously. In Europe, Vancouver — sorry, in Europe, France has its own vacancy tax. However, France is slightly different from the ones that I just mentioned because theirs is one that was implemented by the national government, whereas in the U.S., local jurisdictions typically implement these sorts of policies.

Akina: Well, in places where there are vacancy taxes, how do they get enforced? I imagine that once a tax is levied, the municipality or the authority enforcing it has to take measures such as hiring new personnel, opening new offices, establishing penalties and fines, and maybe even establishing a police force. How does this all look? What goes into the enforcement process, and how effective is it?

Ahokovi: Yeah, so in most cases, enforcement is dependent upon property owners registering their vacant properties with the local government. 

Other enforcement mechanisms come in the form of auditing and inspection, where government officials actually try to check utility usage, such as water and electric, to determine whether a property is occupied or not. 

Governments have also implemented whistleblower hotlines, that let people effectively tattletale on others who haven’t registered their vacant properties.

Now, the issue of enforcement is important because, as many people have pointed out before when researching vacancy taxes, sometimes the enforcement of the policy can often exceed the benefits of the policy. 

So, as you mentioned, you know, that might require hiring additional administrative staff to administer the tax and to keep track of people who are compliant and non-compliant with the tax. 

So, yeah, those are some of the things that contribute to efficient enforcement. As of right now, as I said, there aren’t too many examples of vacancy taxes out there. So the literature is unfortunately fairly scarce as to whether these taxes are enforced efficiently and effectively.

Akina: Well, beyond the potential nightmares in terms of enforcement, what could some of the side effects be of trying to enact taxation on empty homes? 

There must be some people who, for good reason — as local residents as well — have their homes empty, for whatever purposes there may be, and they could get caught up in some real legal issues in this. What kinds of negative side effects can we see?

Ahokovi: Yeah, so, you know, probably one of the biggest sources of contention with this idea of a vacancy tax is that there are definitely some legal and constitutional implications with the idea that the local government can mandate the usage of a property or can essentially force you to utilize your property in some sort of way. 

Now, I’m not a legal scholar — my area is economics. But that is definitely a glaring problem that has been debated a lot about in the vacancy tax literature.

Another issue with the vacancy tax is that there might be some incentive there for the property owners of existing vacant property to pass the burden of the tax on to tenants that they may already be landlords for. 

So, for example, if a property owner has a few vacant properties, but also rents the property out, rents some of his property out to other people, he might be taxed on some of that property and then pass off the burden of the tax by increasing rents for other tenants. That’s also quite a large problem associated with the vacancy tax because if people want to increase affordability, they might actually inadvertently decrease affordability with the tax.

Akina: Now, when we decide to go after research at the Grassroot Institute, it’s not because we’re sitting around in the office trying to think of things to research. There’s definitely a context, and there was a real context to the first report in your series that took a look at urban myths, so to speak, or things that people believe about the causes of the housing shortage and the housing costs, but are not necessarily founded on research or fact. And the first report had to do with the myth of the “outside buyer.” Do you want to summarize that just a little bit and tell our viewers what we learned and how we learned it?

Ahokovi: Yeah, sure. So for those who may not be familiar, I authored, I did author our recent report on the influence of out-of-state buyers in relation to housing prices here in Hawaii. And basically what we found is that the prevalence of out-of-state buyers has been decreasing over the past decade. So it’s really hard to make the case that out-of-state buyers have driven up local housing prices if in fact we’ve seen fewer of them over the years. It’s very hard to make that association.

Instead, we make the case that out-of-state buyers really are, like you’ve said, Dr. Akina, a scapegoat. It’s a very politically attractive notion to sell to the public that outsiders are the cause of a very internal issue, such as the state’s very burdensome housing regulations.

Akina: Well, it’s very interesting to note that many public figures and other individuals, including some in the media, simply don’t look at the numbers. They don’t seem to be terribly concerned about the kind of research methodology that we use and instead continue to use various anecdotal methodologies. 

Let me give you an example. I heard recently in a public setting a public official say that most of the buyers of the homes in the Kakaako area must be from the mainland, because when he drives by at night, he sees the lights out, and for that reason, he must be viewing empty homes purchased by mainlanders.

Now, as a supposition, that’s fine, but when public policy is based upon such ideas, we end up with certain consequences in the policy world that we really don’t want to have. What are your thoughts about this?

Ahokovi: Yeah, so I think that idea boils down to the basic political economy of the issue, like I mentioned before, that there’s an incentive for lawmakers to use things like you’ve said, like anecdotal stories — the darkened apartment buildings in Kakaako — as evidence to suggest that this is an issue that is widespread throughout the state. 

And I think the incentive works out in such a way that, as I mentioned before, it’s very politically attractive to pass off the blame to some external mechanism when the problem really is an internal mechanism.

The same goes, for example, when it comes to City Council hearings on proposed developments in residential neighborhoods. 

So, for example, there’s a lot of good research out there that finds that people who currently live in a community have a disproportionate impact in the decision-making of local councilors when deciding to approve or reject a housing project in that community.

And it’s a very similar function to how legislators act when they talk about outside buyers or say empty homes. It’s that it gets a lot of votes. It’s very attractive. But once again, what gets a lot of votes isn’t always the most effective policy, especially when it comes to the housing crisis here.

Akina: In both of the recent reports you’ve worked on, you have used very strict methodology that has been applied nationwide looking at all the available data we possibly could look at. What kind of feedback have you gotten from professionals who actually understand this kind of research? For example, some of the economists who’ve looked at our work.

Ahokovi: Yeah. You know, I will say that this was my first foray into the world of research and public policy. Because, you know, I don’t think I was ready to bear the brunt of the impact from, say, the general public, you know, and contrast that to the response from, say, academia and the professional world. 

So when we look at the response from, like, the professional world, from economists and other experts in housing, it was a generally very positive exchange. Even though some people were still skeptical of the idea that outsiders had very little impact over prices, it was still very good to get the feedback from those experts because I, for one, admired a lot of them.

For example, in the outside buyer report, I was able to get comments from Joseph Gyourko who’s an economist at the University of Pennsylvania who developed the Wharton Land Use Index that measures the restrictiveness of regulations across the U.S. in the housing market. I got to talk to, you know, Paul Brewbaker, for instance, who’s a very smart man.

Now, when we juxtapose that with the reaction from the general public, it was very much 50-50.

I actually distinctly remember that somebody made a TikTok about me, and made a TikTok about the Grassroot Institute, talking about how we were funded by developers and that we had all this dark money funding this disinformation. 

But, you know, to tell those people who may be listening, that was not the case. I did not receive any additional funding besides my regular paycheck for this research. 

And so, yeah, I think, you know, the reception was mixed. And I think it’s too early to tell what the reception might look like for this empty homes report. But I hope that I can see somewhat of a slightly better experience from the first time.

Akina: Well, much of the response by some of the public who are critical is not well-informed in terms of understanding the research methodology, and actually in many cases, having read the report, which is well documented.

I think that when we take pains to do this kind of work, it requires a certain kind of audience to appreciate it. But keep it up. You’re doing great work, and we know that the professionals and the peers who review our work are giving us good feedback that it’s on solid ground.

Now, let’s shift gears just a little bit and talk about some alternatives here.

If a vacancy tax won’t help lower prices or increase the housing supply, what would we recommend instead? In the report, we talk about barriers to home buildings such as land use, zoning, other government regulations. We’ve certainly cataloged the kinds of things that are driving prices up and creating greater scarcity. What can we recommend?

Ahokovi: So, put simply, Hawaii’s housing crisis is a supply problem that requires a supply-driven solution. 

Hawaii has the most restrictive housing regulations in the country. All of those discourage home building. So a pretty straightforward solution would be to reform our housing regulations, like single-family zoning, to increase density. And we don’t need to look far for inspiration. 

So, for example, in 2016 Auckland, New Zealand, for example, reformed zoning in about 75% of the city. Now, this was a unique policy change because most of the research that looked into housing deregulation in the form of eliminating single-family zoning have only looked at cities that deregulate only certain parts of the city, mostly below half of the city. 

Auckland was a unique example because of the fact that Auckland deregulated the vast majority of the metropolitan area. And what have we seen in Auckland since the policy change? Well, we saw that the construction rate doubled as a result of the policy change. And, in fact, it immediately reduced housing prices in the densest areas of the city.

And Auckland is also a great example because people often say, you know, you can’t compare Hawaii to the mainland. You know, you can’t compare Hawaii to other places. Hawaii is unique. You know, Hawaii exists in the middle of the Pacific Ocean. 

But, you know, I hate to break it, you know, to the naysayers, but Hawaii really isn’t that special. You know, I always hear this and I always like to repeat: The laws of supply and demand do not discriminate. The laws of supply and demand apply whether or not you exist on the U.S. mainland, and they apply whether or not you exist in the middle of the Pacific Ocean.

And if the laws of supply and demand apply to us, then that means that the clearest solution for Hawaii’s housing crisis is to build more homes. And I don’t think that it gets any simpler than that.

Akina: You know, the irony is that when we argue for the building of more homes, even if the people we were talking to agree to the solutions that we’re proposing, sometimes we’re told that more housing might just encourage more people to move to Hawaii and buy up all that housing. And so ultimately, we’ll never be able to solve the problem of high-priced housing in Hawaii. 

Let me let you end on that note. What do you think about that kind of response?

Ahokovi: Yeah. So that’s a very popular theory of Hawaii housing, and I like to call it the Malthusian theory of Hawaii’s housing crisis, which refers to Thomas Malthus’. or Robert Malthus’. theory of population growth that if we allow too many babies, the planet’s resources are going to deplete. 

But what I’ll say to that is that there’s really no evidence, no good evidence of this idea that building more homes will increase demand and increase prices. And, for example, we have countless examples, such as in Auckland, like I just mentioned: More construction, lower prices.

In New York, there’s good research that finds new construction reduces rents in close proximity. 

There’s good evidence out of San Francisco that new construction that results from natural disasters, for example — which provides a good natural experiment — reduces prices. 

There’s good evidence out of Minneapolis that finds that new construction not only reduces rents, but it also reduces the chances of eviction for renters. 

The evidence is very clear. It’s supply that’s the issue and supply has to be what guides the solution.

Akina: Well, Jensen, thank you very much. I appreciate you being on the program today, and I appreciate your great work at the Grassroot Institute. Mahalo.

Ahokovi: Thank you.

Akina: My guest today has been Jensen Ahokovi, a research associate at the Grassroot Institute of Hawaii, where we believe that research-based solutions are the best kind of work that can be done in finding what to do about Hawaii’s problems. We want to see you next time. I’m Keli’i Akina on ThinkTech Hawaii’s “Hawaii Together.” Until then, aloha.