Saturday, July 17, 2010

A Livable City

When I was young the downtown core of Toronto has few people living there. It was expensive and there were very few houses and condos. That changed when Ontario introduced the Rent Registry. The idea was for the province to regulate how much rent landlords could charge. The effect of this regulation was that the price for condo rentals decreased dramatically. The lower price point brought in more people, which in turn created more demand for condos. The result was a boom, as more and more people moved downtown. It turned the burnt out core into a vibrant and interesting place to live. As more and more middle class people flocked in, they populated the streets and bars. The streets turned from desolation to lively and active neighborhoods.

The lesson here is that increasing the numbers of middle class living in the downtown causes the entire area to be more attractive. It blossoms. If you chase them away, the core will go back to desolation outside of the 9 to 5 business hours. It was unfortunate that the Rent Registry was ultimately disbanded. The role of a good government is insure fair play wherever possible. Over-sight like the registry helps to counter-balance people’s inherent greedy nature to take advantage of over-demand or an economic boom. Everyone wants to make money but some will always to willing to push that too far.

In 1998 Ontario introduced Market Value Assessment. The idea was to peg property taxes to the value of the house, so that as the value increases, the home-owner pays more in tax. It was a reaction to the realization that some of the older households were paying way less in taxes. While one can sympathise with the goal, the legislation was crafted in a way that the property taxes where continually increasing in sync with the real estate market. It is unfortunate because we’ve entered into a period of speculation where house prices are grossly over-valued. Once it became commonly known that property was artificially increasing too fast, more and more people jumped in to continue the bubble. Speculation is over-valuing our properties.

Ultimately this means that while this situation continues, the taxes will sky-rocket. The dangerous side-effect is that it will force more and more low income people to sell their houses, further driving up the costs. It is a cycle. Sadly, left unchecked this situation will reverse the gains made by the introduction of the Rent Registry. House prices downtown are already beyond the reach of most middle-class and it will get worse. If you drive out the middle class from the downtown core, the streets will have less people, the criminals will move back in. When the bubble bursts, the rich will abandon their houses, and the core will once again descend into darkness.

There is a way around this. Market Value Assessment was intended to fairly distribute the property taxes. That worked as expected, but as it continues to grow out of control the side-effect is disastrous. If instead we pegged any taxes for recently sold houses to MVA, but left the growth for existing households at a more reasonable fixed rate, such as the cost of inflation, we could keep the middle-class exodus from occurring. So, if you buy a house, the property tax will increase dramatically, but if you continue to live there is will grow reasonably.

Of course this means that the new people will pay more in taxes than their neighbors. This isn’t really that unfair because they’ve also paid considerably more for their house if the neighborhood is getting better. Eventually the high prices will reduce demand. At this point the price starts to go down, the reduced tax burden will induce more people to move in. Potentially the new people could end up paying less in taxes, if the neighborhood has seriously declined. The demand for the neighborhoods will always ebb and flow, but that instability shouldn’t drive existing residents out.

The goal for a livable city is to attract and keep as many middle-class people as possible living in it’s core to prevent it from becoming desolate. Driving them out is counter-productive. We’ve actually seen this in practice, but it seems as if our over-lords are not really paying attention.