How Taxes Drive Down Home Values

December 7, 2011

In the past five years, house prices have declined to 2003 levels, and the average home declined in price by 3.9 percent over the last year alone.  National politicians are scrambling to reverse the trend.  But the remedy lies in state houses and town halls, says Nicole Gelinas, a contributing editor to the Manhattan Institute's City Journal.

  • A house is worth what a buyer is willing to pay for it in monthly costs.
  • But when you buy a house, you're not just committing to a mortgage -- you are also promising to pay the future property taxes on that house.
  • What drives those local property taxes are the future costs of paying state and local workers and retirees, particularly retirees' pensions and health care.
  • These costs are going in one direction: up.

Unless state and local governments take steps now to reduce future costs, or unless they plan on suddenly repudiating their promises to their public-sector work forces one day, every dollar in unfunded pension and health care costs is up to a dollar less in the future value of a house.

Take one example, New York's Westchester County, the highest-taxed county in the nation.

  • According to the Tax Foundation, property taxes in Westchester average $9,044 annually -- up by $1,707, or 23 percent, in the five years from 2005 to 2009.
  • What if property taxes in Westchester were to increase by another 23 percent, to $11,124, in the next half decade, or even the next decade?
  • That's an extra $2,080 in annual costs per house, or nearly $175 every month.
  • Even after deducting these levies from his federal tax bill, a homeowner would end up losing $1,456 a year.
  • Families that considered buying a house would sensibly lop that extra amount off the price they are willing to pay -- and the seller would lose about $23,500 in investment value.

Yes, it's true that New York and New Jersey recently enacted caps on property-tax hikes, and California has long had such a cap.  But unless state and local governments rein in costs, local governments will have no choices but to find a way around these caps.

Source: Nicole Gelinas, "How Taxes Drive Down Home Values," National Review, December 1, 2011.

For text:

http://www.nationalreview.com/articles/284537/how-taxes-drive-down-home-values-nicole-gelinas

 

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