Various tax regulations on real estate are both loved and hated by various people. Proposition 13 in California is blamed by prospective home buyers as being one of the reasons buying a house is so expensive. “Long-time homeowners aren’t paying their fair share.” What we rarely see is that income tax deductions for mortgage interest favor new home buyers. Taxes never make anything cheaper unless a tax “refund” is given for taxes that weren’t paid.
Long-time homeowners will typically have much lower mortgages and thus much less opportunity, if any, to deduct their mortgage from their income taxes. Long-time homeowners bought their home at a lower price and thus a lower mortgage, and have also paid off a significant portion, possibly all, of their mortgage. With time, standard deductions grow and the mortgage interest decreases, the value of the mortgage deduction can disappear entirely. New home buyers who take on significant mortgages to purchase their homes are the biggest beneficiaries of the mortgage deduction.
A recent article/opinion published by the Mercury News presented the opinion that State And Local Tax (SALT) deductions make housing more expensive for new home buyers. “Still, sadly, tossing more money at the housing market only benefits the few who qualify – and makes house hunting a futile chase for the masses.” The author believes that if SALT deductions were eliminated, home prices would fall, making home purchases more affordable to everyone. Taxes never make anything cheaper. They encourage certain activities through deductions and redistribute wealth between people by taking away more money from some people than others.
The author later states: “Even a massive construction push, often touted as a cure for affordability, only works if housing creation is significant enough to cut home prices. And don’t expect developers to overbuild willingly.” He seems to completely ignore that the price of something is nearly always tightly related to the cost of producing it. Housing isn’t a rare art object whose price is set solely by who wants to own it the most. If builders COULD BUILD MORE homes and make a profit, they would build more homes. Any taxes make homes less affordable. Tax DEDUCTIONS indeed change affordability between people, but they don’t make housing more expensive.
Too much of the housing affordability discussion is focused on taking away from one group of people to give to a different group of people. Government officials don’t want less government, so they can’t make housing more affordable by reducing taxes; instead, they look at redistributing incentives, which can ultimately lead to higher housing costs. Builders in Silicon Valley are forced to provide “affordable” units when they propose new construction, pay impact fees supposedly to pay for parks when there is no land available for new parks, even pay fees for things such as public art. (Palo Alto requires developers to contribute 1% of their construction costs to fund public art – $37,000 for a median priced home).
Voters should hold government officials accountable for affordability, and should stop them from pushing voters towards fighting each other over deductions.