I've been thinking about this a lot lately. I live in NYC so I see some of what's happening in the property market here. I've also lived in London, Zurich and Australia.
The problem, ultimately, I think is trade agreements.
I came across this comic [1] recently that resonated with me. Trade agreements aren't about trade anymore. Tariffs and protection are at all time lows. Really they're about the free movement of capital.
The English-speaking world and much of the rest of the developed world has embraced the idea that real estate is a speculative investment. This includes allowing foreign capital to flow in and buy up property.
A lot of Manhattan condos are bought by the wealthy, many of them foreign, who don't live here at all (ie it's just a means of parking money) or they visit a few times a year.
The NYT has done a piece on this [2]. Luckily, much of Manhattan is still co-ops. For those of you unfamiliar with the history of this, NYC imposed rent control on property owners in the post-war era (up until 1973). Coops were a reform to allow building owners to divest themselves of apartments being rented below cost after the massive inflation of the 1970s.
Rent control tenants were offered their apartment at a discounted rate. They became owners and the owners divested themselves of the loss-making asset. Win-win.
Co-op residents technically own shares in a corporation. That corporation owns the building. Your shares give you the right to inhabit a certain apartment. You must however abide by the co-op rules. Some are lenient, some very strict. Co-ops can dictate a lot of things like:
- Whether or not you can use the apartment as a pied-a-terre;
- Whether or not and how much you can sublet your apartment (some note at all, some very lenient, lots in between);
- How much financing is allowed. Many require a 20-25% downpayments and significant post-close liquidity. The more aristocratic buildings don't allow financing at all.
And so on.
The net effect though is that most co-ops tend to be fully or near-fully occupied, at least until you get to the very high end. This is actually good for the building and (IMHO) the city.
Without this NYC would be doomed to become a desert of unoccupied condos.
There are problems. Property tax is grossly unfair as the system is decided by the state government in Albany and they have heavily skewed it in favour of SFHs (single family homes). Plus for incumbent owners there are Prop 13 like caps on rate increases.
Also within apartment buildings there are problems. A $100m condo pays $18k/month in property tax. A $3m condo pays $3k. How does that make sense? It probably dates back to Bloomberg's idea that attracting billionaires who never live here is somehow good for the city.
At the same time as all this you need property investment to some degree as that's what provides the rental market. So you can't eliminate it entirely. But this is what I think you need:
1. A higher bracket of capital gains tax paid by non-residents of wherever the property is. This should include any residential property held through corporations or trusts.
Now you have to be careful with this because there's also the flipper market. These are people who buy distressed properties, fix them up and sell them. I actually believe these people are providing a useful service in rehabing neighbourhoods.
2. Property taxes that are in line with market values that don't discriminate on property type;
3. Higher property taxes for non-residents (and trusts and corporations);
4. No property transfer taxes like NYC's "mansion" tax.
Lastly, I don't have a huge amount of sympathy for the argument that people in entry-level jobs should be able to, say, afford to live in Manhattan. Why? Why is living anywhere a right? You hear the same thing about San Francisco.
At least in NYC there are options if you're on a lower income (Queens, NJ, NY, many of which have good transport options). Whatever problems there are in NYC the Bay Area is a mess an order of magnitude worse.
Vouncouver is another place that's had property driven up to sky-high levels. In that case it's because of rich Chinese seeking a safe harbour for their money and/or (ab)using the invest-to-immigrate program in Canada (how is buying an expensive house investing in Canada exactly?).
Freedom of capital is a problem. It allows companies to avoid paying taxes with transfer pricing. It allows voters to vote themselves huge benefits from the government treasury and then abandon the city, state or country when that debt collapses on itself.
[1]: http://economixcomix.com/home/tpp/
[2]: http://www.nytimes.com/2015/01/11/realestate/new-york-citys-...