Here come the California Prop. 13 attacks...

[c1ue]

Re: Here come the California Prop. 13 attacks...

I believe government will always grow as large as you let it.

Agreed. I think we're both classic conservatives in that sense (note I don't say Republican!)

And I see no reason it should grow directly in proportion to property values - why should people who happen to live in places that later become popular always lose?

Perfectly understandable.

The point I was making though, was that government would not need to grow (in number of employees, for example) in order for the property tax delta vs. inflation to make an impact; that the spending of government (should) be roughly in line with inflation is assuming that nothing new is added to the equation.

Thus just keeping government the same (schools, etc) would mean that income not being generated by property taxes must be compensated for in other ways: individual/corporate income taxes, sales taxes, fees, what not.

Secondly people living in popular places - if with a program like Prop. 13, the present people might be fine, but what of their children?

What about the classes not wealthy enough to buy a home?

I would argue that Prop. 13 reduces overall turnover as there is a very real penalty to selling an existing home. This reduced turnover (supply), plus the opportunity to get onto the property tax subsidy bandwagon, in turn increases property values more than they should because there is no negative feedback loop on existing homeowners.

This in turn raises rents for everyone not already in a home.

This is the same line of thinking behind the research showing that rent control actually raises average rents.

I agree that the 2% cap is probably not well aligned with reality. But I absolutely think value at acquisition plus an annual percentage increase that over the long run corresponds with inflation is the right number. Note that house prices have outperformed inflation in CA more so than in many places... like Texas - so I'm not sure that is a fair comparison. What Buffet failed to mention is that he pays less property tax for his Ok Mansion than I do for my house.

Annual assessments theoretically should mimic acquisition value plus inflation - of course the assessments will be skewed by real estate prices vs. say food prices. On the other hand, the assessment system also drops taxes as quickly as it can raise them.

As for house prices outperforming inflation in California vs. Texas - there are several differences beyond the property taxes. For one thing, California was absolutely the leader in aggressive and inventive loan tactics.

But even before that, Prop. 13 was there. I've got a to-do to examine home prices in CA before and after Prop. 13, also in comparison with a few other states. This would one reasonable test as to whether Prop. 13 really is doing what I say it does, economics-wise.

As for Buffet, the specific quote:

He pointed out that the tax on his $500,000 home in Omaha increased by $1,920 that year. Meanwhile, the levy on Buffett's $4-million house in Laguna Beach, which he bought for less than $100,000 in 1971, rose by just $23.

8x the value of CA home vs. NE home, yet the CA property tax increase was 1.2% of the Nebraska one. Or in other words, the CA property tax change was less than 0.2% of the NE property tax change for an equivalent value of property. And less than the cost of a steak dinner to boot.

Is this fair? This is Buffett's point.

[SeanO]

Re: Here come the California Prop. 13 attacks...

The point I was making though, was that government would not need to grow (in number of employees, for example) in order for the property tax delta vs. inflation to make an impact; that the spending of government (should) be roughly in line with inflation is assuming that nothing new is added to the equation.

Agreed. To be clear I also think property taxes should be based on acquisition value + inflation. However, owners should not be subject to, and governments should not benefit from speculation, bubbles, trends, etc.

What about the classes not wealthy enough to buy a home?

I would argue that Prop. 13 reduces overall turnover as there is a very real penalty to selling an existing home. This reduced turnover (supply), plus the opportunity to get onto the property tax subsidy bandwagon, in turn increases property values more than they should because there is no negative feedback loop on existing homeowners.

This in turn raises rents for everyone not already in a home.

This is the same line of thinking behind the research showing that rent control actually raises average rents.
As for house prices outperforming inflation in California vs. Texas - there are several differences beyond the property taxes. For one thing, California was absolutely the leader in aggressive and inventive loan tactics.

But even before that, Prop. 13 was there. I've got a to-do to examine home prices in CA before and after Prop. 13, also in comparison with a few other states. This would one reasonable test as to whether Prop. 13 really is doing what I say it does, economics-wise.

EDITED SHORTLY AFTER ORIGINALLY POSTING....

I don't see "turnover" in this sense as "supply". I see it more as forced migration - which would impact demand. Ultimately as the worlds 8th largest economy, with fertile valleys, worlds tech capital, worlds entertainment capital, beautiful coasts and scenic mountains, I would argue CA will continue to be one of the most sought after places to live in the world - and that all a market value based property tax system will do is serve to hurt the folks you think it will protect.

Also note that CA's appeal is >WHY< CA was the leader in aggressive lending tactics --- security instruments based on CA real estate are easier to sell, and therefore were more heavily marketed (to brokers) - afterall everyone knows that investing in real estate is all about location, location, location. Unfortunately the Wall St wizards pushing this crack didn't model that we'd start converting fertile farmland into houses so fast that supply would outstrip demand, builders would discount to sell, and their subprime borrowers would walk away from their now upside down property.

Perhaps there is some merit to your point that it would create a short term negative feedback loop, that might have even short circuited the recent and unprecedented rise in across the board CA home prices. But I think there are better ways to address that problem that don't require displacing families who have long term investments in communities.

Also if you do happen to do that research be sure to factor in the impact of the CA Coastal Commission which, if memory serves, came into being around the same time as prop 13 - and which I think had a far greater impact on prices.

Thanks for the interesting discussion.

Sean

[c1ue]

Re: Here come the California Prop. 13 attacks...

Sean,

Good point about the California Coastal Commission.

In general, what I would try to correlate is housing prices in states with yearly or alternating yearly assessments vs. Prop. 13 type states.

The objective would be to understand whether there is any relationship between property tax rates and housing appreciation.

As a control, it would probably be necessary to compare with several other factors including state population changes, average income changes, and overall tax levels.

Far in the future though, I've got too much to do to engage in this level of research.