Do Vacancy Taxes Work? Yes, But Speculators Hate Them

Special taxes and fees designed to reduce the number of unoccupied units in a region have proven effective, but not without lots of squirming from investors.

In many urban centers around the world, especially in cities like San Francisco, Vancouver, and London, housing affordability has hit crisis levels. Local governments have found a new lever to pry open “locked down” properties: the vacancy tax. 

This tax imposes a levy on property owners who leave their properties unoccupied for a certain period, often set at a year or more. The tax is intended to encourage owners to either rent out or sell the property rather than leaving it vacant. There are other tools in play that are more on the carrot side than the stick approach, such as homestead exemptions, that reduce taxes for full-time residents. But let’s save those for a later article.

What’s Motivating Vacancy Taxes?

The main drivers for vacancy taxes are:

1. Addressing Housing Shortages: In cities where the demand for housing outstrips supply, vacant properties—especially luxury homes and apartments—sit unused while large swaths of the population struggle to find affordable housing.
2. Reducing Speculation: In cities like Vancouver, foreign investors have been accused of hoarding properties as speculative assets, leaving them unoccupied and contributing to skyrocketing real estate prices. By taxing vacant properties, cities aim to curb this kind of speculation and promote a more sustainable real estate market.
3. Encouraging Urban Revitalization: Vacancy taxes are often pitched as part of broader urban renewal initiatives. Cities hope such taxes may reduce blight and encourage the revitalization of neighborhoods.

The Evidence: Do Vacancy Taxes Work?

1.  San Francisco’s Vacancy Tax
San Francisco implemented its Vacancy Tax in 2019 to combat the problem of vacant homes in one of the most expensive real estate markets in the United States. A study by the San Francisco Board of Supervisors found that after the vacancy tax was enacted, more than 2,000 vacant homes were returned to the rental market in the first year alone.

However, experts have also pointed out that the tax had a more modest impact than originally expected, as many property owners still found ways to avoid the tax by claiming exemptions (such as renovation projects or temporary stays by family members).

Nonetheless, the vacancy tax did result in an increase in rental inventory in a city where the vacancy rate is often below 1%. According to San Francisco’s Office of Economic Analysis, the vacancy tax has improved housing availability, but it remains just one tool in a broader strategy to address the housing affordability crisis.

2. Vancouver’s Empty Homes Tax 
Vancouver’s Empty Homes Tax was implemented in 2017 as a response to growing concerns about the number of unoccupied homes, particularly in the luxury market. Research from the City of Vancouver shows that between 2017 and 2020, the vacancy rate for homes in Vancouver dropped from 4.6% to 1.4%, with more than 15,000 properties either rented or sold after the tax came into effect. 

The impact has been significant, particularly in reducing the number of foreign-owned vacant properties. According to the Vancouver Empty Homes Tax Annual Report, the tax generated over CAD 115 million in revenue in its first few years, which was reinvested into affordable housing initiatives. These funds have been used to help fund projects such as the Rental Housing Initiative, aimed at creating more affordable units for Vancouver's residents.

Source: Vancouver Annual Report 2024

Despite the success in terms of reducing vacancy rates, critics argue that the tax has had limited success in addressing the broader affordability issue in Vancouver. The high cost of living and the influx of foreign investment continue to push up property prices. While vacancy taxes have helped, they are seen as just one piece of a much larger puzzle.

3. London’s Council Tax on Empty Homes
In the United Kingdom, some local councils, including in London, have implemented a Council Tax on Empty Homes to incentivize owners of long-term vacant properties to bring them back into use. Research conducted by The Guardian found that the tax has led to a slight increase in the number of vacant homes being rented or sold. However, the real impact of these taxes is harder to quantify, as they are typically much lower in cost compared to taxes in cities like Vancouver or San Francisco.

What Are the Limitations of Vacancy Taxes?

While vacancy taxes have proven to be effective in reducing the number of unoccupied properties, they are not without limitations:

• Exemptions and Loopholes: In many cases, property owners find ways to avoid paying the tax through exemptions for renovations, family use, or other legal loopholes. For example, in San Francisco, some owners temporarily rent out properties to family members to evade the vacancy tax.
• Limited Impact on Housing Affordability: Vacancy taxes alone are unlikely to solve the broader issue of housing affordability, particularly in cities with high demand and limited supply. While they may increase housing inventory, they do not directly address issues like speculative investment or the high cost of new construction.
• Effectiveness Depends on Local Context: The success of vacancy taxes varies based on the city’s unique housing market conditions. In markets with high levels of speculative investment, such as Vancouver, vacancy taxes can have a more significant impact. However, in cities where the primary problem is a lack of housing supply rather than vacant properties, vacancy taxes seem less effective.

Overall, vacancy taxes do work—though their effectiveness is often dependent on the local context and must be part of a broader housing strategy aimed at achieving long-term affordability and reducing housing inequality.