The Economic Impacts of Constraining Second Home Investments

[by Christian Hilber]

Investment in second homes has been surging around the world. This surge has triggered a serious political backlash in many countries, especially in tourist areas and superstar cities. The backlash has at least in part been driven by legitimate concerns, such as ever more unaffordable housing, destruction of areas of natural beauty or creation of ghost towns during large parts of the year.

The crucial question is how politically to address these concerns. Some countries, such as the UK, and cities, such as Vancouver, have introduced substantive transaction taxes on the purchase of second homes.

Another policy that has become increasingly popular are constraints or outright bans on the construction of new second homes. The latest example in the UK is the Cornish seaside town of St. Ives. Other local communities in Cornwall and across the rest of the country have signalled interest in including similar policies in their own Neighbourhood Plans.

What are the economic impacts of such bans on local housing and labour markets? This is the question that my co-author, Olivier Schöni, and I explore in a recent CEP study.

In our empirical analysis, we exploit a unique quasi-natural experiment, the Swiss Second Home Initiative (SHI), to test theoretical predictions and identify causal effects of a ban on the construction of new second homes.

The SHI requested that construction of new second homes be banned in municipalities where such homes represent more than 20% of the total housing stock. The SHI was approved by the narrowest of margins – 50.6% of votes and 13.5 of 26 cantons – in March 2012. It came into force in January 2013.

Voters in tourist municipalities with very high shares of second homes were heavily opposed, presumably due to fears about adverse effects on the local economy. This contrasts with voters in the larger Swiss cities who favoured the initiative.

So what were the effects of banning the construction of new second homes in desirable Swiss tourist locations? The ban on the construction of new second homes lowered the price of primary homes, adversely affecting local homeowners, but increased the price of second homes, further raising the wealth of existing – typically already wealthy – second homeowners. We also find that the policy increased unemployment rates, thus harming the local labour force.

All in all, our findings suggest that the local economy effect (affecting primary house prices negatively) dominated the amenity-preservation effect (affecting primary house prices positively), resulting in an overall fall of the price of primary homes. They also suggest that, at least in the Swiss context, constraining the construction of new second homes reinforces rather than reduces wealth inequality.

Banning the construction of new second homes or imposing transaction taxes on second home purchases may be politically popular policies in the short run. But our research suggests that they may not do anything to cure the underlying causes of the problems.

[If you’d like to learn more about second homes, and the theoretical and empirical work we’re doing to look at the impact of constraints on investment then take a look at our longer piece in the latest edition of Centre Piece]