Zachary Yost – October 23, 2019
The great 19th-century French economist Frederic Bastiat once argued that “between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee.” Being an avowed socialist, it is little wonder that Bernie Sanders falls into the category of a bad economist, however, his recently released housing plan makes it abundantly clear that Sanders, like all bad economists according to Bastiat, “pursues a small present good, which will be followed by a great evil to come.”
Sanders’s recently-released plan for the American housing market is large and multifaceted, however, several points stand out as being clear examples of a failure to consider the unseen and unplanned effects of policy proposals.
Take Sanders’s plan to institute “a 25 percent House Flipping tax on speculators who sell a non-owner-occupied property, if sold for more than it was purchased within 5 years of purchase.” Along with that, he proposes a 2 percent tax on any homes that are left vacant as a means to incentivize more houses to be put up for rent or sold. The planned effect is quite clear. By levying such a confiscatory tax burden on people who purchase houses to sell them at a higher price Sanders wants fewer people will engage in “reckless” and “greedy” speculation that supposedly keeps homes off the market.
Sanders hopes that this move will push plenty of housing onto the market at a lower price. However, even if Sanders is correct that his proposed tax would stop real estate investors from buying properties and “flipping” them, it is not clear that that would benefit anyone, including home-buyers and renters.
To begin with, what even is “house flipping”? It generally refers to the practice of real estate investors purchasing a property, sometimes one that is in poor condition, and then making repairs and improvements and then selling the improved property at a profit. The HGTV channel is full of various reality shows where real estate investors engage in the practice, often in expensive housing markets in glamorous cities. However, reality TV glamor aside, this practice is very common around the entire country in many different kinds of housing markets.
In other words, house flipping is a form of capital improvement and maintenance facilitated by the division of labor. There is a great deal of entrepreneurial risk-taking involved. House flippers may purchase a property only to discover during the course of renovations that something is bad behind the walls and requires thousands of dollars more repairs.
By instituting such a confiscatory tax, Sanders plan increases the risk that house flippers might not break even if repairs and improvements don’t go as planned, which would likely drive more flippers out of the market. This would mean that fewer homes would be on the market in a “move-in ready” state and would require that the new owners either undertake the renovations themselves or go through the rigamarole of hiring contractors to do the job for them. This option already exists now, as homebuyers are free to buy a home that requires lots of work, but the very existence of the home flipping industry demonstrates that a great many consumers prefer to buy their home already repaired and updated.
Alternatively, those house flippers who do stay in business will likely end up charging much more to make up what is lost to taxes. The result would be that only wealthier people will be able to afford to move into flipped houses, while those with less income, who Sanders claims to care about, will be forced to move into unrenovated homes by necessity.
Similarly, this tax would not only hurt house flippers and their homebuying customers but also some landlords and tenants as well. Landlords will face a five year period where they are locked into owning a property unless they are willing to eat the 25 percent tax if they were to sell it. In some circumstances, this may delay landlords making significant property improvements until after the five years has elapsed as a way to ensure they will not be trapped taking a big tax hit in the event they need more liquidity and sell the property.
Sanders’s plan also demonstrates another typical flaw of central planners, in that his plan fails to take into account the different housing market conditions in different parts of the country. I live in the greater Pittsburgh area, where the population has declined every decade since the 1950’s. This means that housing is actually very cheap here compared to many other parts of the country. Four years of rent at the tiny studio apartment I used to live in outside of Washington D.C. would easily pay for a modest two-bedroom home here.
However, a large amount of this cheap housing is very old, with numerous homes dating back to the 40s if not before. This older housing naturally requires a great deal of repairs and upgrades to be comfortable. Having spent a great deal of time working on older houses with my dad (for renting, not for flipping) I can attest that they come with a host of difficulties and quirks outside of regular renovation and repair woes ranging from ancient wiring and plumbing to dealing with plaster and lathing instead of plasterboard.
Sanders’s flipping tax would likely have a smaller effect in housing markets where the population is growing and large amounts of new housing is being constructed but in places like Pittsburgh and the rest of the rust-belt where the population has been steadily declining for decades, the negative results could be much more pronounced. Local municipalities already have to deal with a plague of old abandoned housing that leads to urban blight. By driving away house flippers even more housing stock that could be refurbished and inhabited will instead be wasted and left to rot and collapse, contributing even further to the destruction of communities.
This is but one part of Sanders’s vast plan for centrally planning the nation’s housing. It would likely lead to higher quality homes costing more, narrow consumer choice, lead to fewer improvements in rental homes, and cause a great deal of waste and urban blight in older housing markets. This aspect of the plan alone would cause a great deal of disruption and trouble but were the entire plan to be implemented the result would be horrible. Given what is at stake, this example only goes to demonstrate the danger bad economists pose to society and the truth of Mises’ declaration that “economics deals with society’s fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen.”
Image source: Gage Skidmore