By Christian Hilber, LSE Department of Geography and Environment
c.hilber@lse.ac.uk
In May 2016
the local residents of St. Ives approved a referendum that stops newly built
houses in town from being used as a second home. A few other Cornish towns have
followed suit. And tourist destinations in other parts of the country are
contemplating similar policies. The Economist,
the Times
and the BBC recently pointed to unintended consequences of these
policies: higher prices for existing homes, less construction of newly built
homes and an adverse effect on the local economy—mainly tourist and
construction businesses.
In recent
research (here and here
for the academic piece) we explored the economic impacts of banning the
construction of new second homes in the touristy parts of Switzerland. The
Swiss Second Home Initiative was approved in March 2012 and banned the
construction of new second homes in municipalities with more than 20% of such
homes.
There is one
crucial difference between the Swiss Alps and St. Ives. In the Swiss Alps,
primary and second homes are very different; think of wooden chalets near ski
lifts as second homes and stone or brick buildings near schools and stores as
primary homes. In St. Ives and other towns in Cornwall, primary and second
homes tend to be rather similar—they are close ‘substitutes’. This has
important implications.
When the ban
was introduced in Switzerland, demand of second home investors shifted
elsewhere, perhaps to the French or Austrian Alps. Unemployment rates started rising
and the price of primary homes started falling relative to the unaffected
areas. And because already built second homes became dearer (no new
construction allowed!), the price of these rose with the unintended consequence
of financially benefiting the owners.
In St. Ives,
where the typical primary and second home tend to be rather similar, demand of investors
shifted from newly built to existing homes, increasing the price of existing
homes and reducing the price of newly built ones. The emerging gap between the
two prices is the so called ‘conversion option’ of existing homes—the monetary
value of the option to convert a primary into a second home. Newly built homes
no longer possess such an option.
So it seems
the bans in Switzerland and Cornwall backfired. In the case of St. Ives,
existing housing has become even less affordable for young would-be buyers who
want to get their feet on the owner-occupied housing ladder, and, there is less
new construction of affordable housing. But also local firms, particularly
construction and tourism businesses and, importantly, their workforce, lose out.
If the ban intended to help young local residents who struggle to find decent
jobs and affordable homes, then it backfired spectacularly.
The ban in
St. Ives will likely not even succeed in improving the local community ‘character’.
One particular concern in tourist destinations like St. Ives is that they are
seasonal and thus, for much of the year, resemble ghost towns. The trouble with
the ban is that it does encourage second home investors to buy up existing
homes from local residents. Over time, St. Ives is thus set to become more—not
less—like a ghost town. Exactly what the ban intended to avoid.
The only
potential beneficiaries of the ban are already existing owners of housing in
St. Ives—owners of existing primary and second homes. They financially benefit
because their assets are higher in demand and thus become more valuable.
So what can
and should be done to address the legitimate concerns of local residents in
touristy places?
First and
foremost, local policy makers and local residents have to ask themselves
whether they are really willing to accept and bear the long-run adverse
consequences associated with keeping second home investors out, namely, an
adverse effect on the local construction and tourism businesses. If (big if)
the answer is ‘yes’, then local authorities should consider alternative
policies to a ban.
A much better
policy would be a sizeable annual local
tax on the current value of second homes. Compared to a
ban on the construction of second homes, such a tax has important advantages.
First, it generates revenue for the local authority and this may be used to
provide or improve local public services for permanent residents—think of local
schools, libraries or social services. A ban, in contrast, generates zero
revenue and moreover limits the potential of local authorities to benefit from
Section 106 agreements—private agreements between local authorities and
developers attached to a planning permission to make development, that would
otherwise be unacceptable, palatable to local authorities. Second, since the proposed tax has to be paid every year, it
discourages buying property for investment purposes. It makes the investment
less attractive financially. This will help with the affordability of existing
homes. A sizeable local annual tax will most effectively repel those investors
who consider second homes as pure investment and not as consumption. The second
home investors who still buy, mainly for consumption motives, can be expected to
be around more often. Seasonal tourist locations will look and feel less like
‘ghost towns’.
But why not
just a tax on the transfer of properties? The trouble is that the Stamp Duty
does not encourage second home investors to use the property more intensively.
In fact, the longer the investor holds the property, the less important, is the
Stamp Duty relative to the capital gain at point of sale. The same argument
applies to potential new second home investors. A rise in Stamp Duty will lead
to a small one-time downward adjustment in the price (reflecting the increased
anticipated tax burden). Once prices adjust, new second home investors may
still mainly consider expected capital gains and not the presumed consumption
value of the property. And it is important that the tax is local because otherwise it does not generate local tax revenue,
benefiting local residents.
Allowing local authorities to charge a multiple of the Council
Tax to second home investors may be a sensible ‘second best policy’ that is
clearly preferable to a ban. The trouble is, that the Council Tax is highly
regressive. It thus won’t much discourage wealthy investors from buying large underutilised
properties.
How could the proposed policy work in
practice? One could just take the last sale price of
a house (from the Land Registry) and the corresponding local house price index
to adjust the price to the current market price. The local authority could set
a tax rate on the so assessed current price. A high (low) tax would reduce
house prices significantly (moderately) but also strongly (only weakly)
adversely affect the local economy.
The political backlash against second home investors is not
confined to Cornwall or Switzerland. It is a worldwide phenomenon. There has been a staggering amount of wealth accumulation among a
growing cohort of high earners that has led to a dramatic increase in second
home investments in the more desirable seasonal tourist areas worldwide (and in
‘superstar cities’ such as London). The ensuing political backlash has been
spreading quickly around the world.
Second home investors are a
popular scapegoat—In Britain mainly for the ongoing housing affordability crisis.
However, the nation-wide crisis has little to do with second home investors. The
underlying causes are mainly a dysfunctional planning system and a lack of
fiscal incentives for local authorities to permit residential development (see here or here). If national policy makers are
serious about addressing the national housing crisis, they should focus on the
underlying causes, otherwise, like the ban in St. Ives, their policies are
likely to backfire as well.
