Taxing Vacant Homes

Oahu is no different that its neighbor island counties when it comes to having a shortage of homes for its residents.  The news focus has recently been on Maui because their housing situation is critical.  Actually, their housing problem is above critical, and I’m not sure what adjective to use.  Maybe dire?  Maui was already short thousands of units when the Lahaina fire removed 2,000 homes from an already insufficient inventory.

 

Things on Oahu are bad, but not as bad as Maui.  Still, Oahu is short thousands of units for both rentals and ownership.  The “bright minds” at the building Santa will be dipping his toes in the fountain soon (Honolulu Hale) believe they have come up with a plan to help solve the problem.  The Honolulu City Council is debating Bill 46, a measure to add additional property taxes to homes that are not lived in.  The text of Bill 46 states [the bill is] intended to help address the City’s dual crises of homelessness and a lack of affordable housing that arise from inadequate housing supply and inadequate funding.”

 

The bill reads that any home where there is not someone living in the home for 6 months of the year is declared vacant.  The bill allows for lots of exceptions such as military deployment, actively for sale, construction, ownership issues pending in court, etc.  Every property on Oahu will get a form each year where the owners will need to complete and attest to their property’s usage.  The city will employ auditors and inspectors to catch those trying to pull a fast one.

 

I am skeptical of the motives behind the introduction of this bill.  It was introduced by Council Chair Tommy Waters.  The stated purpose of this proposed tax is to generate funds to help the homeless and fund initiatives for more affordable housing.  That is a noble cause.  But many are being swayed to support this measure thinking it will free up housing inventory for residents.

 

The proposed tax is onerous.  To soften the blow, the tax starts with a “teaser” rate the first year of 1% of the assessed value, then 2% in the second year, then climbs to its full amount in year 3 and beyond of 3% of the property’s assessed value.  This extra tax is on top of the property taxes the homeowner already pays.

 

Let’s use as an example, a home assessed for $2,000,000.  Since the home is not owner-occupied and has a value over $1,000,000, they are put into Residential Class A.  They’ll pay $4,500 per year on the 1^st million and $10,500 per year on the 2^nd million, for a total of $15,000 in property taxes alone.  With this new tax proposal, they’ll pay an additional $20,000 in tax in year 1, $40,000 in tax in year 2, and a whopping $60,000 per year starting in year 3.  In 3 short years their property taxes will have jumped from $15,000 per year to $75,000 per year, a 500% increase.

 

This bill is just bad government thinking, and here’s why.

 

It Won’t Generate More Housing:

If this tax measure goes into effect, it will generate a few million dollars annually.  The bill cleverly and quietly allocates only 50% of what’s collected for its stated purpose.  The remainder goes into the general fund.  The operating budget for the City & County of Honolulu for fiscal year 2025 is $3.63 billion.  That’s right BILLION.  What is a few extra million going to accomplish?

 

Playing Class Warfare:

Let’s take it from the rich, they can afford it!  That seems to be the rallying cry from our politicians these days.  It is a brilliant ploy, as their numbers are small.  I’m not sure if you’ve witnessed the growing despair of our residents.  Hawaii has always been an expensive place to live and wages here are significantly lower than those on the mainland.  Those conditions are not the fault of rich people.  Tommy Waters, who is not poor himself, is pushing this tax as an easy way to grab more money from a small group of people outnumbered by those living in desperation.

 

Forcing People to Sell:

Rich people buy homes here because they love Hawaii.  But at some point, they’ll sell because it no longer makes fiscal sense to hold onto a place here.  Maybe that’s the true underlying purpose of this bill.  But that reasoning is very shortsighted.  Can a majority of people living in Hawaii afford to buy a $2,000,000 home?  The properties these non-residents own are not the 2-bedrom condo in Aiea, or the townhome in Mililani.  Their homes are not contributing to Oahu’s housing problem.  They are also not taking away inventory for rentals.  $2,000,000 homes are not considered affordable rentals.

 

 

Our housing problems are far more complex than rich people owning homes here and keeping them vacant except for their casual use.  We need to demand better from our politicians.  Proposals like Bill 46 are meant to divide us, not solve the real problems.  We need to wake up and realize that a majority of Hawaii’s residents are working at jobs that pay poorly.  Housing costs and our other costs of living will continue to rise.  Until we find solutions for better paying jobs, more of us will be priced out of paradise.

 

 

Now It’s Flood Insurance?

FEMA has completed their 5-year project using the latest technology to map out potential flood zones on Oahu.  Currently the maps are just “proposed” and must go through public hearings before being put into effect.  There are some major changes to areas never considered prone to floods.  If your home sits in an area that becomes classified as a flood zone, you’ll be required to purchase flood insurance if you have a mortgage.

 

While the requirement to carry flood insurance will add to the already high costs of living in Hawaii, not having flood insurance in case of a flood would be far worse.  Yet, most of the news coverage of this story has been negative.  Politicians were on the record demanding our US Senators and House Members hold hearings to let the public voice their opposition to the flood zone changes.  After what we all saw recently with North Carolina and the other southeastern states, wouldn’t you want to be insured if that happened here?

 

When we talk of floods, we categorize them on grand scales of 100-year and 500-year occurrences.  If you think about how relatively recent it has been that we’ve lived in-mass in certain areas of the island, maybe we haven’t seen the worst?

 

If you want to see if your property is impacted by the proposed changes to the flood maps, here’s the link:

 

https://www.resilientoahu.org/getfloodready

 

 

Let’s look at one “old” Honolulu neighborhood to see the changes – Palolo Valley in Kaimuki.

 

 

Here’s the current flood zone map.  As you can see, no part of the valley is in a flood zone.

 

 

 

Here’s the proposed flood map now showing dozens of homes now categorized in a flood zone.

 

 

 

 

 

And now the week’s economic news…….

 

Strong Consumer Spending

After moving significantly higher early in the month due to the much stronger than expected labor market report, mortgage rates began to ease a little during the first half of this week.  This was quickly reversed on Thursday, however, when the consumer spending data exceeded expectations.  As a result, mortgage rates ended the week nearly unchanged.

 

While many forecasters have been predicting a slowdown in spending by consumers due to higher prices and credit card rates, the latest report indicated that consumer spending remains unexpectedly strong.  In September, Retail sales rose a solid 0.4% from August, above the consensus forecast, and the results were even more impressive if volatile auto sales were excluded.  Some of the categories displaying strength included bars/restaurants and clothing, while appliances and furniture displayed weakness.

 

The Department of Labor releases the total number of new claims for unemployment insurance each week, and the latest reading was 241,000, well below the consensus forecast and down from a recent high of 258,000 last week.  Although this suggests labor market strength, these figures are receiving extra scrutiny from investors because of the challenge of removing the effects of the hurricanes.

 

At its June meeting, the European Central Bank (ECB) implemented its first rate cut since September 2019.  On Thursday, the ECB again reduced benchmark interest rates by another 25 basis points to 3.25%, as expected, marking its third cut this year.  In contrast to the U.S. Fed, which began its current loosening cycle with a larger 50 basis point reduction, the ECB has proceeded in gradual increments of just 25 basis points.  The statement released after the meeting again emphasized that future monetary policy decisions will be based on incoming economic data, while providing no specific guidance.  According to the statement, the battle against inflation is "well on track" and officials expect to reach their target level next year.  Investors anticipate that there will be one more 25 basis point rate cut by the ECB before the end of this year.

 

 

 

Next Week

Investors will look for Fed officials to elaborate on their plans for future monetary policy and will continue to monitor the situation in the Middle East.  It will be a light week for economic reports highlighted by the housing sector data.  Existing Home Sales will be released on Wednesday and New Home Sales on Thursday.  Durable Orders will come out on Friday.

 

 

 

 

 

Until next week….