How Property Tax Policy Changes Can Fix Housing Shortage

Performance Property Real Estate Question

Q: I have been having a hard time finding a place to buy and my younger sister has been trying unsuccessfully to find an apartment. Why is there such a shortage of housing and what can be done about it? Crystal, Hoboken, NJ

A: There is a housing shortage both for homes to buy as well as rentals particularly in major cities where demand for housing is typically higher. Despite this huge housing shortage there are lots of vacant, unused or underutilized lots in major cities. For example, NYC has over 75,000 vacant or underdeveloped lots. This problem stems in part from the skewed property tax system we have in the US that disincentivizes development and encourages land speculation. A property’s appraised value is usually separated into a land component and a building component. Property taxes on the land portion are usually very low and the property taxes on the building portion may be too high. This mismatch encourages investors to buy land and sit on it rather than develop housing units on it. Increasing the property taxes on the land portion and perhaps lowering the property taxes on the building portion would light a fire under vacant land owners particularly in cities where demand is high either to build housing units or to sell their land to someone who will. Adam Smith, the father of capitalism argued in favor of land taxes and making more productive use of land particularly in cities would help alleviate the housing shortage and make housing both to buy and to rent more affordable. Thanks for your question, Crystal. 

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