August 1, 2024 – The verdict is in: Vacant home taxes can improve housing availability, but not affordability, according to a new C.D. Howe Institute report.
In “Ripple Effects: The Impact of an Empty-Homes Tax on Canada’s Housing Market,” authors Gherardo Gennaro Caracciolo and Enrico Miglino examine the growing popularity of vacant home taxes to help tackle Canada’s housing crisis using Vancouver's 2017 empty-homes tax as a case study for implementing this tax in Canada.
Specifically, the authors use the “difference-in-difference” economic technique – which compares two groups where one has experienced a change, and the other has not – to assess and evaluate if this tax has improved housing affordability and availability. For their research, Caracciolo and Miglino used neighborhoods within an average distance of eight hundred meters from Boundary Road (which has an empty-homes tax) and the municipality of Burnaby (which does not); focusing explicitly on three aspects: The vacancy rate (the percentage of empty homes); the number of dwellings; and the average rent.
“Despite their popularity and the fervent political debate around the topic, there is, to the best of our knowledge, very little existing literature evaluating and quantifying the impact of taxes on vacant homes,” says Caracciolo.
“Shedding further light on the topic is crucial in helping policymakers strike the right balance between encouraging the productive use of existing properties and ensuring a steady supply of new homes in response to growing housing demand.”
Their findings reveal that the tax significantly reduced the number of empty homes –dropping the vacancy rate by 1.5 percentage points.
“To put this in perspective, the average vacancy rate in the taxed areas was 7 percent in 2016, so a reduction of 1.5 percentage points represents a 21-percent decrease in the number of empty homes,” says Miglino. “In real terms, this means that out of the 1,078 empty homes in these areas in 2016, approximately 226 homes became occupied as a result of the tax.”
However, the tax did not affect the average rent, or the number of new dwellings being built.
This indicates that the tax successfully targeted the issue of empty homes without causing unintended negative effects on the housing market such as increased rent prices or reduced housing construction, the authors write. However, it also shows that the empty-home tax was an ineffective measure for improving housing affordability.
“When using this tool, policymakers should understand that, while this tax might be part of the larger solution, it has limited impact on the ultimate goal of improving affordability,” says Caracciolo.
Beyond homeowners misreporting their property status, the authors write that there are two possible explanations for this contradictory economic result: i) Vancouver’s status as a city stuck in a bad equilibrium, where landlords do not lower prices despite increased availability; and/or ii) landlords, who might leave their properties vacant in the future, pre-emptively passing potential future tax costs onto current tenants.
“This implies the need to look at other measures to tackle affordability issues more effectively,” conclude Caracciolo and Miglino. “The current housing crisis is a complex issue, and only when we act on a comprehensive suite of policies will we tackle it promptly and effectively.”
For more information contact: Gherardo Gennaro Caracciolo, Faculty, Simon Fraser University; Enrico Miglino, Economist, Bank of Italy; and Lauren Malyk, Senior Communications Officer, C.D. Howe Institute, 416-865-1904 Ext. 0247, lmalyk@cdhowe.org
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.