“We want to buy a home but we can’t compete with investors who offer all cash.”
“We want neighbors who are excited to buy here and call it home, not ones who buy and then turn around and sell the house for a major profit.”
An anti-speculation tax policy works by establishing a tax to discourage speculative investors, or “house flippers,” from buying and rapidly reselling properties. In many communities like Richmond, large investors have been buying up groups of homes and either holding them as corporate landlords or selling them for a quick profit.126 When these speculative investors do this, it inflates demand above the interest in that market that normally drives demand, forcing families to compete and pay higher prices, increasing rents and evictions.127 This can make it more difficult for moderate-income families to buy or rent a home.
Understanding the Policy
The common refrain of investors is “buy low and sell high,” and this logic often leads housing investors to communities that have been economically marginalized for so long that home prices are low. In many cases, these low values are the result of systemic impediments created by policies that limited economic mobility along racial lines. In Richmond, exclusionary housing policy in the twentieth century and municipal zoning ordinances that concentrated polluting industries and people of color in neighborhoods for decades kept housing prices depressed and limited wealth building opportunities for these populations.128
Measures indicate that the rate of speculation in Richmond spiked after the foreclosure crisis, has come down and is not high at the moment. From mid-2009 to mid-2012, a majority of homes sold in Richmond were purchased with cash. The percentage of absentee owner purchases tripled between 2008 and 2012.129,130 To understand the house flipping action around the time of the Great Recession, in 2007 there were only 93 Richmond properties sold that had been bought within the previous three years. In 2008, this number rose over 600 percent to 568, then more than doubled again the next year in 2009. However, after 2009, this flipping decreased, and over the last four years has been consistently around 300 properties flipped per year, which is still three times as high as pre-crisis levels.131 Trends suggest that a rise in speculative investment may be on the horizon again. One measure of speculative activity is what’s called a price-to-rent ratio, which sheds light on the difference between a fundamental interest in the housing market and overheating demand.132 High price-to-rent ratios in neighboring cities like El Cerrito and the historical trends for the price-to-rent ratio for Richmond suggest that another speculative wave will likely occur in the next few years in Richmond.
An anti-speculation tax tempers overheating demand by discouraging the practice of house flipping, helping to lower the high price of homes for sale and staving off the displacement of vulnerable residents. Even if a market is not presently experiencing speculation, the risk of future speculation and a desire to safeguard a population from speculation can serve as justification to implement an anti-speculation tax. In the event of rising sales prices leading to an increase in speculative activity, the tax would kick in to discourage any actors seeking to take advantage of the arbitrage opportunity resulting from price trends. In this sense, the tax can be thought of as an automatic stabilizer, remaining dormant when speculation is low and activating to deter price increases due to the creation of artificial demand during boom times.
Designing the Policy
An anti-speculation tax is a transfer tax, applying a fee when a property is sold. As a transfer tax, not a property tax, it is not subject to Proposition 13. Anti-speculation taxes can vary by city, but San Francisco provides a good example of what a tax on speculative investment could look like. In 2014, San Francisco voters considered Proposition G, a proposed tax on the total sale price of multi-unit residential properties. Under the proposed law, if someone bought a multi-unit property and then sold it in less than five years, they would have to pay a tax. The tax was proposed to be set at 24 percent initially and decrease incrementally to 14 percent by the fifth year. In writing the policy, a community can create exemptions that allow some homes to be exempt from the rules. In San Francisco, some of the situations that were exempted included:
The property is sold for an amount equal to or less than what the seller paid for the property
The property is sold within one year of a property owner’s death
The property is legally restricted to low- and middle-income households
The property is newly built housing
Anti-speculation taxes have been adopted only twice in the US—in the instance of a short-lived tax in Washington DC and an anti-speculative land tax in Vermont aimed at preventing out-of-state resort industry interests from driving up land prices for native Vermonters.
The anti-speculation tax must be designed to deter speculation that is overheating demand but not discourage investment that is helping to maintain a functional housing market. Analysis in Ontario, Canada found that monopolistic speculation had the effect of a “reduction in the supply of the commodity available to the public and a price above the long-run competitive equilibrium.”133 The analysis distinguishes between competitive speculation—speculation by individuals who don’t affect the market as a whole—and monopolistic speculators, where a speculator attempts to buy significant control of a commodity to influence the market price. Understanding this for Richmond historically and presently will be key in designing an anti-speculation tax that helps to keep housing prices under control yet maintains market stability. Analyzing hold times between flipped Richmond properties will provide a useful indicator for this.
One limit of an anti-speculation tax is that it is unlikely to raise very much public revenue if the rate is set at a deterrent level. If the primary objective is for the tax to curb and deter speculation, then the tax rate will be set high enough to discourage speculation from occurring. If the policy is effective, then little speculation will occur and little taxes will be collected.
Putting the Policy in Place
The idea for an anti-speculation tax to discourage the rapid buying and selling of homes has been around since Supervisor Harvey Milk proposed it in the late-1970s in San Francisco. An anti-speculation tax could serve as part of a suite of policies aimed at curbing displacement and maintaining affordable housing prices. Currently, there is no anti-speculation tax in Richmond.
Since 1978, local governments have required the approval of at least two-thirds of voters to pass taxes that are specifically allocated (whereas if the tax revenues go to a general fund, the tax only requires a simple majority).134 In the end, the San Francisco measure needed a majority but got 47 percent of the vote and lost. To pass a similar tax in Richmond, affordable housing advocates would need to do a lot of work in educating voters about what this tax would and would not do. During the 2014 election, state and national real estate industry lobbyists spent millions of dollars spreading misinformation to influence the vote in San Francisco. Additionally, much of the anti-Proposition G narrative criticized the fact that the money would not go to support affordable housing, but go to a general fund because it only required a simple majority to pass (this was a similar critique of Richmond’s failed attempt to pass a soda tax). Real estate interests also critiqued the proposition as potentially harming homeowners who did not intend to speculate, but who had to leave their homes unoccupied because of a family emergency or an unanticipated job transfer.135 These concerns could be addressed in Richmond through the addition of an appeal process or of exemption provisions to the policy, for instance an exclusion for homeowners who own and occupy only one property in the city, which would help identify the homeowners who are not using property exclusively as an investment.
In the case of the short-lived anti-speculation tax in Washington DC, the tax was established in 1978 and was allowed to expire just three years later. Powerful lobbying by real estate interests in DC, using a narrative of property rights and arguing that the speculation tax would hamper homeownership opportunities for Black residents, led to the repeal of the DC anti-speculation tax.136
Smith Institute Analysis of Speculation in London: “The Case for a Property Speculation Tax,” by Andrew Heywood and Paul Hackett of The Smith Institute, https://smithinstitutethinktank.files.wordpress.com/2014/11/the-case-for...
Analysis of Speculation Tax in Ontario, Canada: https://www.jstor.org/stable/pdf/3144982.pdf?refreqid=excelsior:9ef3f251...
“The Rise of the Corporate Landlord; The Institutionalization of the Single-Family Rental Market and Potential Impacts on Renters,” by Right to the City Alliance, http://homesforall.org/wp-content/uploads/2014/07/corp-landlord-report-w...
“Housing Prices and the Role of Speculation: The Case of Seoul,” by Donghyun Park and Qin Xiao, https://www.adb.org/sites/default/files/publication/28239/economics-wp14....
- 126. “The Rise of the Corporate Landlord: The Institutionalization of the Single-Family Rental Market and Potential Impacts on Renters,” Right to the City Alliance, July 2014, accessed November 15, 2017, http://homesforall.org/wp-content/uploads/2014/07/corp-landlord-report-w....
- 127. Henry McGee and Donald C. Bryant, Jr., “Gentrification and the Law: Combatting Urban Displacement,” Seattle University School of Law Digital Commons 25, no. 1 (1983): 65, https://openscholarship.wustl.edu/cgi/viewcontent.cgi?referer=https://ww....
- 128. Richard Rothstein, The Color of Law: A Forgotten History of How Our Government Segregated America, (New York: Liveright, 2017).
- 129. “Quarterly Home Sale Data for the City of Richmond,” CoreLogic, 2017.
- 130. Mark Andrew Boyer, “Investors pounce on Richmond real estate market,” Richmond Confidential, October 26, 2013, http://richmondconfidential.org/2013/10/26/investors-pounce-on-richmond-....
- 131. PropertyRadar, https://www.propertyradar.com/.
- 132. See definition of price-to-rent ratio at Investopedia, https://www.investopedia.com/terms/p/price-to-rent-ratio.asp. For its use in investment planning, see Winzer, Ingo, “How to Ride the Tide of California Home Prices,” Forbes, 2017, https://www.forbes.com/sites/ingowinzer/2017/03/20/how-to-ride-of-califo....
- 133. Ontario Land Speculation Tax, pg. 4.
- 134. An important ruling by the California Supreme Court in August 2017 found that local ballot initiatives raising taxes for a specific use do not need two thirds of the vote. See http://www.courts.ca.gov/opinions/documents/S234148A.PDF.
- 135. J.K. Dineen, “Tenants, homeowners at odds over Prop. G,” SF Gate, October 3, 2014, http://www.sfgate.com/realestate/article/Tenants-homeowners-at-odds-over....
- 136. Katie Wells, “A Housing Crisis, a Failed Law, and a Property Conflict: The US Urban Speculation Tax,” Antipode, 2015, accessed November 15, 2017, https://www.academia.edu/11054883/2015_Article_in_Antipode_A_Housing_Cri....