Multiple media outlets reported last week that in a bid to cool off a hot housing market, Prime Minister Justin Trudeau’s government announced it will ban foreign investors from buying homes in Canada for two years.
The Canadian government took a number of steps to tamp down speculation and demand amid record home prices including higher taxes.
Could the state of Hawai‘i or county government likewise ban foreign ownership or non-resident ownership of real estate here? The automatic response from most who serve in public office will be, “No. That’s unconstitutional and there are federal laws against restricting interstate commerce.” Or something similar.
But, of course, for those who would like to achieve that end, there are always “workarounds.”
And a lot depends on the definition of “foreigner” that is used.
There are a handful of states that do ban foreign ownership of agricultural land. Iowa law, for example, forbids any “nonresident alien, foreign business or foreign government” from holding agricultural land in the state, according to the De Moines Register.
Bills have been introduced and passed out of the Hawai‘i state Senate to restrict foreign ownership of residential properties, but as is incredibly predictable, those bills died in the House.
It’s not likely that the county has the legal authority to ban anyone from purchasing property here, but they could “disincentivize” such purchases via the property tax structure. In fact, the county already charges local owner-occupied properties the lowest tax rates, while charging investor-owned properties substantially more.
On Kaua‘i, the owner-occupied homestead rate rate is $3.05 per thousand dollars of valuation. For an identical property owned by an “investor,” not rented out at recognized affordable rates, perhaps left empty, or used only part-time, that residential investor rate is $9.40 per thousand dollars of valuation.
With an “effective tax rate” of 0.28%, Hawai‘i is considered to have the lowest property tax rates in the entire United States. In comparison with other high property value areas, Washington DC is 0.56%, California is 0.76%, and New Jersey is 2.49%. (source wallethub.com) Note: This is based on averaged statewide data for general comparison use only.
In Japan, the standard municipal property tax is levied at 1.4% on the assessed value of the land or building.
Clearly, the tax rates for investor-owned properties throughout Hawai‘i could be substantially increased and still remain within the norms of other areas.
No one is fleeing our shores at the moment because their investor-owned property taxes are too high. The fact is wherever those investors are from, it’s a place that has significantly higher property taxes than Hawai‘i has.
So what are we waiting for? Our part-time resident and investor friends utilize county services AND the additional funds raised could be dedicated to the development of affordable housing for local residents. In addition, demand from the insatiable investor market drives up the cost of real estate for the rest of us.
There are already mechanisms in place to protect owner-occupied properties and to incentivize affordable rental properties. These programs and others could be expanded.
If the higher investor tax rates cause investor activity in residential real estate to slow down, most would say that would be a good thing. Not such a good thing, of course, for the person selling the property. The builder and the workers constructing the luxury estate home also may have less work available, unless that was balanced out by an increase in affordable construction.
Let’s be real. The truly rich will keep buying property here even if their property taxes go up substantially. We might as well reap the benefits, charge what the market will bear, and shift those funds into high-quality, affordable homes for local residents.
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Gary Hooser is the former vice-chair of the Democratic Party of Hawai‘i, and served eight years in the state Senate, where he was majority leader. He also served for eight years on the Kaua‘i County Council, and was the former director of the state Office of Environmental Quality Control. He serves in a volunteer capacity as board president of the Hawai‘i Alliance for Progressive Action and is executive director of the Pono Hawai‘i Initiative.
