Turning assets back into homes: lessons from the Canadian property tax system

UK housing is increasingly a place for wealthy investors to park their wealth rather than a place for young people to live affordably. Sylvan Lutz, IF Researcher, looks at UK council taxes and argues that there are lessons to be learned from Canada on its new policy charging high taxes on vacant houses.

Housing has become an asset

In both the UK and Canada extreme increases in the price of housing have driven young people further away from where they want to live and even back into their parents’ homes. The cost of housing in both countries has turned many places where young families want to live into areas of holiday homes for wealthier middle-aged and older people; in some cases housing has even become a place for the global super-wealthy and money launderers to park their wealth. In cities like London and Vancouver young people have been driven from the centre while families have been forced out of mid-sized suburban homes because they cannot afford the cost of housing. Young people need housing to stop being treated as an investment asset and start being treated as homes.

Better use of the existing housing stock

In both Canada and the UK building new affordable housing is a big part, but not the only solution, to the housing crisis. The current housing stock can be better used to provide homes for all generations, rather than investment opportunities for a few. One way of doing this is by reducing the value of housing as an asset and thereby increasing its usefulness as a home.

Like Canada, the UK, and especially London, should introduce higher taxes on unused and under-used residential properties. This would reduce the value of housing as an asset and increase its usefulness as a place to live.

Houses are attractive for investors

Over the past few decades, British and Canadian housing markets have been attractive places for investors. House prices have consistently risen in both countries since the 2008 financial crisis, offering a significant return on investment for anyone lucky enough to own one. These increases have far outstripped wage growth, and for wealthy investors, have offered shelter from the turbulence of the stock market. Houses offer all these benefits while requiring relatively low maintenance costs because the value is tied to the location. While not the only factor, this has contributed to the almost 250,000 long-term vacant houses across England in 2022 (an increase of over 11,000 since 2021). Given the current housing crisis, these vacant assets need to be turned into homes for young people and families.

Untaxed unused housing in the UK

Unfortunately, there is little incentive for owners to sell or rent vacant houses. Based on back of the envelope calculations (D band council tax and average housing price) the current council tax charged on the average household in the City of London is less than 0.2% of the value of the house. In the UK a residence can be unoccupied for two years before council tax is doubled. Even the existing doubling of the council tax after two years (to 0.4%) does very little to reduce the investment value of unused houses.

Even worse, council taxes are related to what a home was worth in 1991, not 2022. As result, council taxes are far from tied to the current investment value of the property and can be regressive relative to house value. This means that British property is a very attractive investment for those who want to buy their second or third home.

Learning from Canadian vacancy taxes

In Canada, investments from wealthy Canadians, the global super-rich and even criminals, were pouring into the housing market. In Vancouver annual wages of over $CA 200,000 (around ₤150,000) were required in 2019 for housing to be considered affordable (cost less than 30% of pre-tax earnings). Housing had become primarily an asset, not a place to live.  In contrast to the UK, various levels of government acted swiftly to ensure that more of the housing stock was used to house residents and not simply as a form of capital investment.

Canadian homes cannot remain vacant for more than 6 months in a calendar year (with some exceptions) without being charged additional taxes; this compares to two years in the UK. Additionally, when these taxes are imposed, they are far greater than those in the UK. For unused properties owned by non-resident foreigners, there is an additional 1% rate that applies across the country. There are also a variety of local taxes that have been implemented over the last few years. For example in BC vacant homes in urban areas are taxed an additional 0.5% to 2% depending on the resident status of the owner. In addition to federal and provincial taxes, all vacant homes in Vancouver are charged an additional 5% tax on the value of the property (increased from 3% to 5% for 2023).

This means that in Vancouver, a city with a comparable housing crisis to London, vacant homes are taxed at up to 8% of their value if they are not occupied for more than 6 months of the year. This makes the City of London’s increase of council tax from approximately 0.2% to 0.4% of house value after two years of vacancy somewhat pitiful.

Housing policy should be for homes

It is time for policymakers in the UK to stop permitting the use of houses as unoccupied assets. To be fair to young people housing must be treated as a place to live and not as an asset to invest in. If an asset is taxed at 8% a year it is no longer a safe store of value and will likely be sold or rented to reduce losses. This could help to increase available housing and reduce the pressure of high rents on younger generations.

Replicating the Canadian high tax rates on unoccupied homes in the UK would be a hugely important first step for governments to take. The next step for both Canada and the UK would be to implement an under-occupation tax that would encourage more efficient use of the housing stock and the densification of urban areas. Reducing the utility of housing as an investment will improve intergenerational fairness across the UK. It is time to help young people to make homes instead of helping investors to make profits.

Help us to be able to do more 

Now that you’ve reached the end of the article, we want to thank you for being interested in IF’s work standing up for younger and future generations. We’re really proud of what we’ve achieved so far. And with your help we can do much more, so please consider helping to make IF more sustainable. You can do so by following this link: Donate

Photo by Pascal Bernardon on Unsplash