How Not to Ruin Your Housing Market

Taren writes:

In terms of Q’s, I am happy to give you an excuse to write about Californian house prices!

Despite being on the other side of the world I love hearing about how housing is different in different areas.

I find that a lot of the problems mirror the market elsewhere so always happy to learn more about that.

I am delighted to have this excuse because there are a lot of people in the US who are freaking out about property taxes and have ballot measures restricting them. Unfortunately, as with many things, California is about 50 years ahead of ya'll on this one, and the results from the future are bad. So hopefully I can inspire a few of you to vote against measures like these, and maybe even inspire a few Californians to vote to narrow or repeal California's property tax measure.

There a lot of in-detail reasons why California's housing prices are so high, but the biggest one is property taxes. Specifically, that they're too low, and they're low in a weird way.

Broadly the shape of the problem is this: A lot of people want to live in California, but California doesn't build very many homes. It doesn't build very many homes because it's expensive to build homes. One of the biggest reasons it's expensive is that it takes a long time, and the biggest reason it takes a long time is that you have to do a lot of paperwork to build anything in California. Local governments have a lot of ways to make it difficult to build housing.

Why Don't Local Governments Want Housing?

Local governments are extremely disincentivized to build new housing, because of a ballot proposition passed in 1978 called Proposition 13.

What this ballot proposition (which I will hereafter affectionately refer to as "Prop 13") does is it caps the property tax rate at 1%, and caps the rate at which the assessed value a property can be increased at a rate of 2% per year. Property tax assessments can be reset in certain situations, such as when the property is sold, but there are enough special cases on those resets that many properties will essentially never have their property taxes increased by more than 2% a year.

You will note that California real estate generally increases in price by more than 2% per year. A cool thing to do is to go on Zillow and look at the houses in, oh, say, Malibu, and compare the sale prices to their property tax value.

I'm going to focus a lot on housing here but Prop 13 also applies to property owned by corporations, which you might notice never do things that might normally cause an individual to transfer property, like "die." Corporations pay something like $8 billion less in taxes every year because of Prop 13.

Property Taxes are Unusually Good Taxes

Compounded over nearly fifty years this does a few weird things to California's housing market.

First, it means that California homeowners are extremely disincentivized to sell their property. Through the magic of compounding interest, the difference between "property taxes you currently pay" and "property taxes you'd pay on a freshly purchased home" can become extremely large. If you've owned the property for 12 years, your property taxes might be as little as half what a neighbor moving in to an identical house would pay.

The cap on property taxes insulates voters from the consequences of policies that increase housing prices dramatically. Existing residents often don't like new housing very much: They don't want their environment to change. This is a very understandable preference! But normally they benefit at least a bit when new housing gets built because it moderates their property taxes. Prop 13 totally breaks that relationship.

Most importantly, it means that property taxes are a relatively small share of municipal budgets, relative to other kinds of taxes. This is very bad because property taxes are unusually good tax, especially for cities and counties. (Not quite as good as a land value tax would be, but pretty good.)

Property taxes are efficient to administer and they're efficient to pay. You don't need to do nearly as much math as you do to tax income, and you don't need to do any special fiddling to keep them from being regressive, the way you do with sales taxes. Property records are by necessity very public, so it's difficult to get out of them. They don't seem to impact behavior as much as sales tax or income taxes.

Property taxes are also very stable. The rate that they go up changes, but they don't go up as much as other taxes during economic booms (creating problems of how to manage that surplus cash) or go down as much as other taxes during economic busts (when, really, you might most want some government spending on social services.)

Finally, property taxes normal scale alongside "things that cost cities money." When a city builds new housing, it also needs to provide more services to the residents of that housing. Shifting the tax base away from property tax and towards other taxes shifts local government incentives relatively away from "build new houses and attract new residents" and towards, uh, other things.

Combine the local government disincentive with the voter incentive and you end up where California is: A policy of "no new housing," (but lots of things that increase demand for housing.)

A Worked Example

To see what this does to municipal budgets, let's compare Oakland and Minneapolis, two cities I've lived in that happen to be remarkably close in size — they both had a population of about 430,000 in 2024.

In that year Minneapolis's budget was 1.84 billion dollars. Oakland's was 2.3 billion — about 25% larger. Oakland's property tax is about 313 million, while — 33% smaller. If you've checked Zillow in both cities recently you will note that Oakland's property market is not 33% less expensive than Minneapolis's. My house here cost about a quarter of what a house of similar size and location would have cost in Oakland.So how does Oakland make up the difference? With higher sales taxes, taxes on real estate transfers, and special taxes on business activities.

The tax on real estate transfers directly makes buying a house more expensive. The reliance on sales tax means that when Oakland allows new retail and office space to be built it gains much more tax revenue than when it allows new housing to be built, while also taking on less services spend.

In the Bay Area especially, the cities are all stuck in this prisoner's dilemma where everyone is trying to build as many office building's as possible to try to capture that sweet, sweet gross receipts tax, while also hoping that someone else does the relatively difficult and annoying work of housing all the people who are supposed to work in those office buildings.

Speaking of: Since I'm using Oakland as an example I'm obliged to note that Oakland does really well on building for a Californian city. If every city in that metro area built like Oakland, they'd have something like a 2 million more homes, and home prices more like Minneapolis. (And I might still live in California!)

What can you do?

If you live in California, vote to narrow Proposition 13. Vote against attempts to expand or retrench Proposition 13. Vote against any ballot initiative that's described as "Save Prop 13."

In 2026, that means vote against Proposition 43. There's often something like this on the ballot in one direction or another— I've probably spent enough words on this topic as it is for now, but if you'd like to hear more about the history of attempts of this kind of ballot proposition I would be happy to write up more about them specifically. They're often kind of arcane, and have to be— you can't just suddenly increase retired people's property taxes, especially if they made their retirement plans around the capped system. Just reply to this e-mail, or fill out the Question Form.

If you don't live in California, don't vote for ballot propositions that cap, constrain, or otherwise do things to property taxes. Even if the goal of the particular measure is good it's probably a bad way to achieve that goal.

In the US, it looks like this year that's Wyoming, Oklahoma, North Carolina, Louisiana, Georgia, and Tennessee. I haven't looked at any of these propositions in detail but if you're interested in the answer to a question like, "What's the deal with Louisiana's five property tax measures?" drop it in the question box and I'll see what I can do to help.

Have a question? Ask it.

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