[Editor’s note: Regular Tyee contributor Patrick Condon published a piece on Wednesday arguing the land tax proposed by Councilor Christine Boyle was flawed in ways that would harm affordability in Vancouver. This rebuttal is by Paul Finch, who drafted policy on LVC adopted broadly by municipal parties including Boyle’s One City.]

Affordable housing is the most important issue in the province, especially for newly elected mayors and city councils across the Lower Mainland. Now that the 2019 BC Assessment values are in, they tell us a lot about how the market reacted to some key policy changes to address the housing affordability crisis. We know that assessments for lower valued properties went up, while more expensive properties saw a loss in value. We also know that higher valued properties have been declining at a faster rate: showing that provincial policies to curb speculation have had an effect, albeit an uneven one that could be improved by a more even taxation method.

Announcements, Events & more from Tyee and select partners This Moment Calls for More Independent Journalism. We Need Your Help to Deliver It We can’t let journalism fade away. Contribute to The Tyee so we can add to our team.

The data not only shows the prospective failure of the “mansion” tax approach favoured by several Lower Mainland academics, it also hints at what would be successful in tackling the affordability crisis: land value capture (LVC).

LVC has gained considerable momentum since I first advocated for it in opposition to the failed transit sales tax plebiscite, and it formed the core of two reports I co-authored with CUPE 1767 President Jared Melvin and Vice President Harpinder Sandhu on building an affordable B.C.

Most recently, Vancouver City Councilor Christine Boyle successfully moved and passed a motion for the city to explore implementation of LVC.

One of the strongest proponents of mansion and development land taxes, UBC Professor Patrick Condon, penned an article in the Tyee on Jan. 2, 2019, criticizing Boyle’s motion and our proposals. While Condon is a staunch progressive who has made important contributions to the debate on housing affordability in the province, his article and policies contained significant errors when it comes to understanding land economics. These I’ll address by raising and answering the key questions.

How does the market work?

In order to understand how the market is operating, we need to see real estate as having two different values, called “speculative” and “productive.” Speculative value is what you can sell property for, and productive is the value of rent you can extract from it — whether residential or commercial.

In a normal market, there’s a strong link between productive and speculative value. For example, purchasers with enough of a down payment to buy rental property can obtain a large real estate loan and rent out properties to slowly pay off the mortgage value. Yet in a market like Vancouver’s fueled by global capital, money laundering and rampant speculation, creditors such as banks bid up the asset price of property by lending as much money as they can to buyers, hoping to reap higher profits off the increased compound interest on the loans. Because the Canadian Mortgage and Housing Corporation (CMHC) underwrites residential mortgages and the Harper government changed the rules to underwrite the CMHC, the banks assume no risk in jacking up prices.

All this is disastrous for renters, first time home buyers and small businesses. Recent owners in a red hot market will take on large mortgages, pushing up rents as they try to get their tenants to pay down the compound interest portion of the loan. Existing owners who are "house rich and cash poor" are incentivized by banks to "renovict" their tenants, so rents can be jacked up on the reverse mortgages they take out to access their home equity.

When it comes to land, the largest driver of value is access to public infrastructure. Roads, schools, transit and other amenities all serve to make certain plots of land more desirable. The number of people who can access those amenities from a given piece of real estate is the next biggest driver, and is controlled by city council through zoning and official community plans (OCPs). This is why when a major transit project is built with public tax dollars, the value of the surrounding land goes up, sometimes by six or 10 times its original value.

To explain by example: let’s say a piece of real estate is vacant and is worth $100 million. A new SkyTrain station is built next door, and the land is rezoned for higher density so more people can access the new transit line. Overnight, the value of the property increases to $400 million, because of its location and the rezoning. The $300 million in profit is called “unearned income,” because the owner has simply benefited from a massive transfer of wealth from the public to their land.

How does LVC work?

LVC captures a portion of unearned income, or the wealth that private landowners accumulate from being lucky, or having insider access to information about where the next transit line will be placed. It does this by taxing the increase in land value at a higher rate than the original value. The "captured" land value can then be used to pay for the public projects that caused the land to increase in value, and also to build affordable and publicly owned non-market housing.

Consider the province’s tax surcharge on homes assessed over $3 million, similar in structure to Condon’s proposed mansion tax. The unintended consequence was that it pushed speculators to invest more in lower valued properties, making them less affordable and driving up rents even while the price of single family homes went down. Because it only targeted a narrow band of housing, it wasn’t able to generate revenues to build out public, non-market housing. This is not to say the school tax was a bad move, rather that its aims would be better accomplished with LVC.

Key to understanding how this works is the “productive value” concept we talked about. When the speculative value or sale price of land increases, the productive value is still determined by the rent that can be collected year over year, minus annual expenses such as taxes. With LVC implemented, mortgage lenders stand to collect less in interest on loans, because the overall revenue they can generate on an annual basis is decreased by the tax. As a result, creditors will lend out a smaller amount for the same property, expecting less profits, and keeping rents in check.

Put simply, LVC is a progressive property tax that is fair and balanced. It prevents rent and land value from inflating too high for tenants and small businesses, and generates income to pay for major public projects like transit and affordable housing.

Are LVC and CACs the same thing?

Advocates of taxes on development like Condon counter that land value is already captured by common practices called Community Amenities Contributions (CACs) and Development Cost Levies (DCLs). These are one-time charges on the speculative value of real estate. What’s important is they aren’t recurring like a progressive property tax, so they can’t capture the land lift, which is based on the productive value of rents year over year. One-time charges like CACs and DCLs actually serve to bid up the price of housing, driving up rents as the costs are inevitably passed on to the mortgage holder.

By taxing land value, LVC can recoup recurring payments in smaller amounts year over year, creating a sustainable cash flow that reduces the "economic rent" that a lender can charge over the term of a mortgage. Vancouver’s policy of CACs over the past decade has been disastrous for affordability, as it not only failed to capture land value, but actually bid up the price of housing and rents higher and higher.

The advantage CACs have for cities is they are large sums of cash collected quickly, even if they don’t cut in to the windfall profits of unearned incomes from wealthy landowners. The counter solution with LVC is simple: even larger amounts of capital can be raised immediately with a land bond, ideally taking advantage of the low interest rates of the Municipal Finance Authority (MFA). The bond is then paid over a long period of time, using the annual revenues from LVC. This ensures the capital needed for affordable housing and transit can be available up front, and loaned from a public rather than private source.

What does Condon get wrong in his article?

In essence, Condon’s proposals to tax development or for using CACs to try and capture land value have been proven ineffective at best, and poison for affordability as the more likely scenario. It is ironic then that this claim is levied at LVC. As a progressive voice on housing, he’s coming from a good place, but working from a model of land economics that doesn’t fit the picture.

Condon is incorrect to suggest LVC would only focus on a moment of rezoning, as it is a tax that recurs year over year, recouping the cost of unearned income. It is actually CACs that occur only in moments of rezoning, and have the effect Condon erroneously places upon LVC. Moreover, the negotiation process for CACs is often opaque, and doesn’t even take place on all rezoning: only those that result in development applications.

On the question of transit expansion, Condon’s critique of LVC is a description of what already occurs: spot zoning and massive land lifts result in unearned income for wealthy land owners and creditors, while rents and prices are massively inflated for everyone else. We need only look at what happened recently along the Canada Line and Evergreen SkyTrain expansions for ample proof. With LVC in place, a portion of the land value lift would have been captured to pay for the transit expansion costs, while rents and prices along the line would have inflated far less.

The problem of land speculators buying up key property along proposed transit lines exists regardless of whether LVC is implemented. The obvious fix is for city council to zone consistently around transit stations for affordable and rental only housing, restricting the development of luxury condos that sit vacant or are populated with higher income earners who are less likely to use transit.

In the case of zoning, it is up to city council to implement a policy of density trading. Our proposal in the Affordable BC plan is for up to 50 per cent of new density to be public and non-market, making rezoning along transit lines conditional on half of the new housing being affordable and publicly owned. Equally important is ensuring that any zoning of residential homes to duplexes or higher will produce lower prices and rents, rather than simply lining the pockets of those fortunate enough to own their homes.

Condon’s concern for fairness when it comes to accidental millionaires along any major transit line or rezoning area is hard to empathize with. Land speculators should rightly be taxed on the unearned income they receive, and those on fixed incomes can defer against the value of their estate under existing tax law. As described earlier, applying LVC to single family homes makes renovictions less likely, and only applies on the unearned income from windfall gains associated with rezoning or big infrastructure projects.

Perhaps most concerning is the confusing claim Condon makes in his article — that he is actually in favour of a “city-wide” LVC, but not one that is targeted around transit expansions and rezoning. Of course, we already have property taxes, and LVC would only apply to the land lift above and beyond existing rates. In the current market, where property prices are generally trending downward, a city-wide LVC would only apply on areas where rezoning or major public infrastructure projects have occurred!

LVC is the best solution

Affordable housing and public infrastructure cost billions in tax dollars. This is an unescapable reality, but the question is as always: who pays? It is only fair that the projects and rezoning that create wealth should be paid for by the landowners and creditors who pocket the lion’s share of that wealth.

We’ve seen the results as failed policies from every level of government have played out over the Lower Mainland: higher rents, inaccessible first time home buyer costs, and increasingly less room for culture, the arts and small businesses. It doesn’t have to be this way. Zoning can be used as a tool for the public good, rather than to line the pockets of wealthy land owners and big banks. Major transit projects can service public housing instead of luxury condos.

By implementing LVC, we can fairly capture a portion of the massive wealth being generated by real estate, and use it to pay for the build out of publicly affordable, non-market housing we so desperately need. Only by building affordable housing stock below existing market prices will rents be brought to levels that allow residents a reasonable disposable income, and to live in close proximity to where they work.

View the BCGEU and CUPE 1767’s plan “Building an Affordable B.C.” here.