What happens when the real estate bubble pops? City Council preview, July 21, 2015 meeting

Halifax council interrupts its summer break tomorrow for the first of three back-to-back Tuesday meetings. On August 5, council goes back into hibernation, not to return until September 8.

The mid-summer break-of-the-summer-break comes thanks to the Washmill Underpass fiasco. Back in 2010, then-CAO Dan English approved a $8,129,590 tender award to Dexter Construction to conduct “Stage 2” of the underpass project — building the new bridges on the BiHi. As I wrote the next year:

According to normal city rules, any contract worth more than $500,000 has to be approved by city council, so what’s English doing approving an $8.1 million contract? Well, the city’s procurement policy does provide an exemption for the half-million dollar limit:

During the summer months (July and August) and for occasions when a regular Regional Council meeting has been cancelled or the regular schedule creates more than eight (8) business days between Council meetings, the CAO or his designate, may approve the award of contracts…

Thing is, there was a city council meeting scheduled for the very next day, June 29. But, hey, we were all excited about the Queen’s visit, which was filling up the week with hoopla and lunches and whatnot, so to free up councillors’ time, the June 29 meeting was cancelled. I have no idea who made that decision, but such decisions are typically made by a nebulous committee that includes mayor Peter Kelly and the CAO. I remember the announcement the previous week clearly, because councillor Gloria McCluskey turned to me and said, “I don’t want to see the Queen; I saw her enough the last time she was here.”

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Regardless, for whatever reason, English was able to single-handedly, without council approval or even council knowledge, commit the city to spending $8.1 million and breaking council’s approved budget for Washmill.

When the Washmill shit hit the Underpass fan in 2011, council mostly adopted a bunch of fake budgets to make the $8 million cost overrun go away, and then passed a new policy severely limiting the CAO’s ability to award tender contracts. Henceforth, council would meet two or three times in the summer in case big tender awards needed to be made. And so here we are, meeting in July.

Condo taxes

Councillors will devote a few hours tomorrow to grandstanding to the Condos Owners Association of Nova Scotia, which appropriately enough goes by the acronym CONS. On July 7, CONS defaulted on its registration with the Registry of Joint Stock Companies, so it technically doesn’t exist, but that won’t stop councillors going to bat for it. There are votes to be had, after all — in general, condo owners are wealthier and more likely to vote than apartment dweller, or even than people who own detached homes.

CONS was one of the primary proponents of the failed “tax reform” revisions proposed in 2009. That proposal would have ditched the assessment-based tax system and replaced it with a flat fee-for-service system. As I wrote at the time:

If the plan is adopted, then, yes, some of the tax burden will be shifted off the urban areas and onto the suburbs, but the tax burden will be shifted within the suburbs as well, with the results in Hammonds Plains — high-priced homes getting tax cuts, modest homes seeing tax increases — repeated throughout HRM: Oceanfront mansions in Portuguese Cove get tax cuts, Spyfield residents get tax increases; high-end Cole Harbour houses get tax cuts, modest Forest Hills Park homes get tax increases; half-million dollar Bedford houses get tax cuts, Sackville tract homes get tax increases.

And that pattern would hold in urban areas as well: most homeowners on the peninsula get tax cuts, most Dartmouth homeowners and apartment dwellers get tax increases.

“Tax reform” is a good-government-sounding moniker designed to disarm opposition before it can materialize — how could anyone be against “reform”? As the proposal was being prepared for next week’s council vote, city staff upped the terminology to an Orwellian extreme — documents given to councillors now flatly declare that the new tax proposal is “the best possible tax system.”

But I’ve been reporting on the city tax issue for over two years and, recently, have conducted an extensive analysis of the “tax reform” proposal. From that work, I conclude that the words “tax reform” are a misnomer purposefully employed to mislead the public. To draw attention to that duplicity, I put “tax reform” in quotation marks.

In fact, my analysis of hundreds of homes and apartments throughout HRM shows that, far from being the “best possible tax system,” the proposed tax system will slash millions of dollars off the tax bills of high-value properties and make up the lost revenue by increasing taxes on modestly priced houses. Further, contrary to the claims of “tax reform” supporters — and as the figures from Kingswood attest — the new system will reward suburban sprawl with tax breaks, and raise taxes for those living in compact, transit-friendly communities.

Worse still, “tax reform” appeals to the very worst of our instincts, putting narrow short-term self-interest of some individuals over the long-term good of the community as a whole.

Thankfully, when the public became aware of the disastrous effects that “tax reform” would bring, there was widespread outrage, and council killed the proposal.

But like many of the zombie lies that dominate our political discourse, “tax reform” keeps coming back to haunt us. Simply by creating new tax categories like the transit tax, separate from the general tax rate, council is adopting the logic of a fee-for-service system, and in implementation these taxes are usually (albeit not in with the transit tax) applied as a direct fee. The proposed “ditch tax,” for example, would be set at a flat rate based on road frontage, and not an assessed rate. We’re getting “tax reform,” not all at once but rather in dribs and drabs.

The condo tax issue comes in the context of the failure and then incremental re-emergence of “tax reform.” The condo issue, interestingly, is driven not by the urban councillors but rather by the suburban councillors. Tim Outhit, representing Bedford, has been the most vocal supporter of a tax reduction for condo owners. Back in 2013, on a motion made by councillor Bill Karsten of Dartmouth South – Eastern Passage and seconded by Lorelei Nicoll of Cole Harbour, council directed staff to “to analyze and review why condominium buildings generally have a higher assessment compared to apartment buildings equal in size, quality and virtually similar in all other factors [and] to consider methods used in other Canadian Municipalities to address this issue, including providing a reduced tax rate and/or other incentives to increase density, review with Property Valuations Services Corporation and bring recommendations back to Regional Council.”

It took two years for staff to write the thing, probably because the issues are complicated and there’s a minefield of politics to navigate. But still, staffer Andre MacNeil did a pretty good job; anyone who wants a thorough understanding of taxes as they relate to condos and apartments should commit a half hour to reading the report.

Probably to stave off his boss, Bruce Fisher, who was the staffer overseeing the failed “tax reform” proposal, MacNeil gives too many head-nods to the “tax reform” report of 2009, and uncritically repeats some of its bogus claims. But MacNeil can be forgiven for this, because he’s quite clear about the (non)role of taxation in people’s purchasing decisions:

With respect to the broader issue of tax incentives for density, the available information suggests that the driving force behind the market for multiple units is lifestyle, economic need, interest rates and individual finances. Property taxation plays a secondary role in the real estate market.

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To help provide some context to this, a public opinion survey was undertaken to determine how people viewed property taxes and the assessment cap and what role those taxes played in their decisions to consider buying a home. The survey indicates that “Property tax considerations have prevented only a minority of homeowners from considering selling their home and purchasing a new one”.

[For brevity’s sake, I’m not going to get into the issue of the assessment cap here, other than to say this is one of the carryovers from Fisher’s 2009 report, which ignored all the good arguments to keep the cap. In any event, even if it wanted to, city council has no power to remove the assessment cap.]

In short, with a very few exceptions, property taxes play no part in people’s decision to buy a house or a condo.

It’s not MacNeil’s role to determine policy, so he gives councillors a few options for policies  reviews a few options that they might consider, as follows, with my comments after each, in italics:

• Frontage Charge for Road Costs – Council could replace a portion of the general tax rate with a frontage charge… A charge such as this would shift the taxes paid away from denser forms of housing (multi-unit properties, mobile homes, row houses) towards those which have much greater frontage. For example, a replacement of $40 million of property tax with $40 million in a new frontage charge could reduce average condo taxes by $200. However, there would be wide ranging implications for many other residential and commercial taxpayers with some paying more tax and charges while others pay less. The advantage to this type of approach is that it positions the tax system away from being a wealth-based system and aligns it with density. However, it is a change that has much broader implications for reform of property taxes and, while a viable option, requires additional costing and discussion.
Notice that the proposed frontage charge would be a flat fee, as opposed to a tax based on assessment. It would also double taxes on people who happened to buy a home on a corner lot. If councillors think the ditch tax is giving them a headache, just wait until this is proposed.

• Maximum Tax on Multi-Unit Properties – Council could ask for the authority to set a maximum tax per dwelling unit for multi-unit properties. For example, Council could consider a maximum tax of $3,500 per dwelling unit for multi-unit condos and apartments. If Council wished it could exclude high end properties from this maximum. There are several practical advantages to this type of approach. While it does not provide a direct incentive for multi-unit properties it helps limit a growing disincentive. Buyers of new condos are facing higher and higher property taxes due to the way the assessment cap is functioning. As opposed to capping the growth in assessment, this approach would put an absolute maximum on the amount of tax paid, thus providing certainty to those considering a change in housing. For those downsizing, this may prevent their property tax from rising, even though they have moved into a smaller home. It would also provide better comparability between apartments and condos. Most beneficiaries of this approach would be condo owners although higher end “condo quality” apartments might benefit should their values continue to rise. What this approach does is limit the distortions that are growing in this segment of the real estate market. It does this without causing major shifts in the tax burden. The cost for this is approximately $2 million in lost revenues. It reduces taxes for roughly 13% of condo owners. The lost revenues might be achievable thru cost reductions without shifting the tax burden to other residential taxpayers.
That last line is hilarious.

• Limit the Tax Increase on Multi-unit Properties – Many multi-unit properties are ineligible for the assessment cap or temporarily lose it when sold. Under the Charter, the municipality could limit the increase in taxes on a multi-unit property to a percentage increase regardless of whether it sells or is improved, thus losing its cap. This could reduce or eliminate the disincentive that exists for individuals to purchase existing multi-unit homes. It would not alter the disincentive that exists for newly constructed multi-unit homes. This proposal would require the Administrative Order to list eligible properties. Depending on the percentage chosen, the revenue loss could be substantial.
This is utterly ridiculous, a recipe for corruption and fiscally irresponsible.

• Reduced Deed Transfer Tax rate for multi-unit purchases – In 2014, condos sold 45% more frequently than other single-family homes, increasing their relative Deed Transfer Tax burden. Council could ask for authority to set a reduced Deed Transfer Tax for the purchase of condos or all multi-unit buildings. This might encourage the construction of additional multi-unit properties.
More on construction below; I’ll leave discussion of the Deed Transfer Tax for another day.

• Request the Province Modify the Assessment Cap legislation – One of the causes of the growing gap between existing homes and others rests in the cap legislation. Recently sold homes lose their cap and have their values reset to market and are then recapped. Apartments (over 3 units) are not eligible to be capped. Newly constructed homes come onto the assessment roll at a higher value than already existing properties and then become capped. Renovated and modified homes lose their cap on a portion of the capped value.

If the capped program were modified to include all homes (e.g. apartments and rented condos) and amended so that homes that sell do not lose their capped values, then the assessment gap between these and the capped homes would be reduced. In addition, some mechanism would need to be created to determine an appropriate capped value for newly constructed homes.
I think simply because it wants to be perceived as doing something, council will probably adopt this proposal. But the province won’t agree to it.

All this discussion reflects an ideological preference for density and a desire to see more apartment and condo buildings constructed.

But here’s the thing: look out the frickin’ window! See all those building cranes? Almost all of them are condos and apartment buildings being constructed.

And here’s the second thing: the bubble is collapsing. Condo sales are flat and declining, and apartment owners are literally giving away their units. Landlords are providing “rental incentives” of two and three months free rent, free internet, even free computers, to get people to sign leases. It’s a renter’s market.

A couple of charts provided to me by Grant Wanzell, a planning professor at Dalhousie, illustrate the problem:

Here’s the CMHC’s graph showing rental vacancy in HRM:

Wanzell tells me that renters are shopping around more, moving from building to building after a year’s lease, because they’re getting thousands of dollars in free rent with each move.

And yet still more cranes are popping up in the city, still more condos and apartments being constructed. Something is askew, but no one is trying to understand exactly what it is.

But whatever explains the construction boom, it’s clear that city property taxes aren’t restraining it. There’s no need to lower taxes on condos and apartments. No matter what the merits of a policy goal of encouraging more condo and apartment construction, it’s happening anyway.

If anything, there are too many condos and apartments being built; if so, it could lead to a whole range of problems when the bubble inevitably pops, from housing issues, to a plague of abandoned construction sites, to a collapse in property tax revenue.

Before it makes any change in condo or density tax rates, council should figure out what’s behind the construction boom and consider what the implications of the proposed tax changes will be when the boom ends.

$50 million for downtown disappears

Tangentially related to the above discussion, later in the meeting tomorrow council will acknowledge what we knew all along — the provincial and federal governments are not going to contribute their two-thirds of the proposed $50 million capital fund for downtown.