The Upshot has a horrific story about hedge fund manager William Ackman buying a $90 million penthouse condo to... sit on it empty until someone ponies up a higher price, your basic condo flipping you usually associate with cookie-cutter suburban developments.
But it actually makes sense this is happening in the New York City luxury market, since the cost of leaving property idle is so low. In many communities, yearly property taxes would encourage an owner to at least rent out a unit to cover the taxes, but in NYC, property taxes on luxury condos are actually lower as a percentage of their buying price than working-class rental units.
As the New York Times itself detailed two years ago, the average American homeowner pays 1.14 percent of the home value each year in property taxes. But because of idiotic rules established by the state government, luxury apartments aren't assessed based on their purchase price but on comparisons to much cheaper rental units nearby.
The Times gave the example of an $88 million apartment at 15 Central Park West -- similar in price to Ackman's new purchase -- whose property taxes were assessed at only property taxes at only $59,000, or just about 0.06 percent of its sale value in property taxes.
That may be real money to the rest of us but that kind of lowball annual property tax rate is not enough to worry a hedge fund manager looking to speculate over the long term. Now if Ackman had to pay 1 percent of the purchase price of his new penthouse each year -- i.e., $900,000 annually -- that would probably push both Mr. Ackman and the rest of the luxury apartment elite to rent out apartments left idle some or all of the year around the City. And a much higher tax rate on those luxury apartments would bring in billions of dollars in revenue to fund social programs, including affordable housing for the rest of working New York.
Unfortunately, too many of the property tax rules are set in Albany, where rich special interests have bought the legislature. But we do need a new movement for property tax reform both to cut back on speculation leaving swathes of real estate unoccupied around the city and to raise desperately needed revenue for the city.