The boom is real, and it isn’t likely to crest any time soon. Is this a good thing, or not ? To many of us, it has become a very bad thing.

This morning, District One Councillor Lydia Edwards posted on facebook that “city officials” are considering two taxes as a means of curbing real estate speculation in Boston. I applaud Councillor Edwards for getting we who live in her District to focus on speculation, which is a real problem aggravating an already major challenge, the huge bull market in Boston’s real estate. That said, I have serious doubts that the Walsh administration has thought thoroughly enough how to relieve the pressure put upon us by speculators.

First, the problem, as I see it, and then my proposals for curbing it, assuming there are any that can work.

Boston real estate has become about as guaranteed a bull market as it gets. The present bull market began in the mid-1980s and has suffered only brief setbacks ever since. The real estate correction of 1990-95 barely touched Downtown Boston real estate. The much larger correction that lasted from 2008 to mid-2012 interrupted Downtown’s bull market. but did not destroy it, as it did the value of real estate in the City’s most vulnerable neighborhoods : prices in much of Blue Hill Avenue’s region, as well as Hyde Park and eastern Roxbury, fell from 40 to 70 percent, and in East Boston by about 20 percent. At the same time, prices in Downtown, slipped barely at all. Commercial construction continued, and by 2013-2014 Downtown residential development resumed its march. Since that time, prices have tripled and in some cases quadrupled. There seems no end to it. At least 100,000 new people have moved into Boston since 2000, or are moving in now, with another 75,000 expected by 2030. (‘m betting it’ll be more than that.)  As long as people want to move into Boston, investors will invest in developing residences for them, which means ever higher prices.

Not only is Boston’s population booming, it’s rising most in the Downtown region. The ground may be limited, but the sky is not, and Downtown is building ever upward. If 200,000 people choose to come here, there will be sky to house them in. In addition, the 100,000 newcomers are bringing incomes with them significantly higher than what has been the Boston average. In 2008 the City’s mean household earning was about $ 59,000. Today the mean for those who have lived here since 2009 isn’t much higher. The income for the techhies, corporate executives, and institutional administrators, however, who are moving into Downtown runs typically from $ 150,000 to $ 350,000 and higher. Compared to the 7,000,000 people who live in Massachusetts this 100,000 to 200,000 isn’t that large a number, but locating them all in Downtown Boston, whose 2000 population had been about 550,000, has enormously overawed the financial facts of our City.

People who earn $ 150,000 to $ 350,000 — not to mention many who earn $ 500,000 and even $ 1 million — have options and want them. It’s not enough to house them; the towers in which developers build million-dollar condominium units offer in-house fitness rooms, cafes, meeting rooms, swimming pools, parking, lobby space, and more. Many towers have a full staff of what we would have once known as servants. Some towers have their own facebook pages. And because those who seek power know that you can acquire it by being physically close to it, people who earn six figure pay and want seven figures can buy in to the neighborhoods created within and between Downtown towers and then schmooze with everyone. Little wonder that Downtown is seeing all manner of boutique businesses open, catering to the high-earner — boites that bring into the City high-earning shoppers as well, not to mention the socializing that takes place in the new Downtown and which itself leads to yet more people wanting to move in.

Nor is it surprising that neighborhoods close to Downtown — the North End, South Boston, Charlestown, the South End , even parts of Roxbury and Mission Hill — have become residential destinations for many others who want the Donwntown life and can afford at least the functional parts of it, the shopping, the restaurants, the night clubs, as well as proximity to all kinds of jobs that either service the new Downtowners or work at lower levels of management alongside them.

Why should this situation end ? What is there to stop it ? Until the economy experiences a turn-around as huge as the one that has made the new Boston, nothing will stop it. Cities can grow almost forever. As long as they’re administered reasonably well, there’s very little reason for anyone with options to seek a life elsewhere. Thus the bull market, and its no end in sight.

If only it were as delightful as what I have described ! Unhappily, even a real estate bull market, which puts a smile on so many faces, also attracts those who abuse the trend. I am talking now about speculation, the problem that Councillor Edwards has spotlighted . No one likes speculation. It adds nothing. An investor at least invests, and her investment builds stuff that people want and can buy. A speculator merely takes. A property that sells for $ 1,300,000 today, and which will bring maybe $ 1,800,000 a year from now, a speculator can buy, not to build, but merely to hold for one year — or less — and then resell, taking a profit earned entirely only by the trend. This is not a thing that bothers only real estate. Speculation in stock markets dislocates the value of stocks and bonds and forces actual investors to pay more, for a trend merely, than they would have to on economic grounds alone.

The nation has a right to disfavor speculative transactions, and the regulators of our stock and bond markets have tools to penalize it. The Federal Reserve Board can raise ‘margin” requirements — the percentage of a purchase price that must be cash as opposed to leverage — and the IRS code includes provisions that incentivize holding a stock or bond for at least five years (I think it is eight years now). These sanctions have worked only in part. Actual investors learned — again — from the 2008 crash that too much leverage is a very dangerous risk, and they have also found that tax rate differences between long term capital gains rates and those of ordinary income — ten percent tax versus 28 percent and more — make it unwise, usually to sell a holding in the “short term.” (I say “usually” because an eighteen percent tax difference doesn’t matter much if prices double, or triple, during the “short term.”) The Tax Code also offers generous amortization deductions which encourage leveraging a purchase to the maximum as well as depreciation tables that negate much or all of any income tax a rented property might generate.

Now we come to the challenge of how to curb speculation in Boston real estate, or to discourage high-price sales. Edwards writes that “City officials” propose two taxes : one, a special tax on “flipping”; the other, a surtax on sales of more than $ 2,000,000. On their face, these two proposals do not work. More is needed:

A “time tax” is feasible, and it is Constitutional, but the City can’t just impose any form of it. The only Constitutional means, I think, is to create a City capital gains tax, with a no-tax rate on long-term holds and a discouraging rate on short-term holds. But how to phrase it ? With stocks and bonds, the time tax is straightforward, because a holding is a holding. But real estate may also be somebody’s home  : and how can we penalize a person for living in a home for less than the tax-approved time ? If I grow up in Boston and buy a home here in 2019, and I am then job-transferred to San Francisco (as happened last year to one of my local friends) after a fourth year, why should I pay a “flip” tax ? Why after even one year ? Or take the case of another friend, whom many of us know : he bought a house on a certain street in 2017, then after four months realized the neighborhood wasn’t where he wanted to be, and bought another home on the exact street he had wanted in the first place, a home he could not buy at first because it wasn’t for sale. Should he have paid a “flip” tax ? Should it matter that in the meantime the market doubled ?

At the very least, a capital gains tax with a hold time basis has to exempt a buyer who actually moves into the property. Yet how will this exemption be policed, and should it be if it can be ? There’s also a very easy dodge to the entire impost: a buyer doesn’t sell the actual property, he sells a purchase and sale agreement for it. This was done during the 1985-90 bull market and again in the 2001-07 bubble. I see no way to tax such a transaction locally. (I will discuss Federal tax strategies later.) The other proposed tax, a surtax on sales of over $ 2,000,000 sounds good at first listen but likely cannot be done. $ 2,000,000 sounds like Big Foot for most neighborhoods, but in the South End, back bay, and Beacon Hill, it’s barely an entry fee. Almost every property therein sells for more than $ 2,000,000. By what reasoning can the City justify penalizing good faith home buyers in these neighborhoods simply because the local price is higher than the trigger figure ? Such a tax also seems to violate the Equal Protection guarantees of our State Constitution. It’s one thing to create separate tax rates for commercial real estate and residential,. quite another to impose unequal consequences upon real estate of the same classification.

Before I discuss options that the City might pursue, I think we need to ask the question, what exactly is the City’s objective here ? Is it trying to blunt the real estate bull market ? Good luck with that. Is it trying to favor long term residence ? We’d all like to see long term residence, but people do have the freedom to move about, and it’s hard to explain, without sounding like a busybody, why they shouldn’t be able to exercise this freedom in their own time. And why the penalty on high sale prices ? Why isn’t the long term homeowner entitled to reap the full benefits of his willingness to invest in the City ? Or perhaps the City is simply trying to divert some of the bull market into its own City coffers. This, the City might have justification to do. After all, the City has to provide the services that taxpayers want, and a busier, more crowded City needs to perform more complicated services.

Asking the question, however, is almost enough to answer it : there is no reason for such taxes that the City can likely convince a majority of voters of. Yet Boston is being radically transformed by the current real estate bull market. We would all like to see long-term residents not pushed out by the bull market, and we would certainly all like not to see any of the price rise go to mere speculators. Can we then do nothing ? I think we can do something.

One : we can triple the residential exemption and raise the tax rate. Doing so might require a Proposition 2 1/2 override, but it wouldn’t require approval by the entire state.

Two : we can give a tax credit to tenants whose rents might be affected by an increased real estate tax rate.

Three : we can recognize that the 2017 Federal Tax Reform capped real estate SALT deductions, thereby disincentive-izing to some extent high real estate prices.

Four : we can require developers to offer a higher percentage of units, than is now required, to the City’s Affordability covenant. We can even ask developers to pay a higher permit fee.

Five : we can give a tax credit to purchasers of residential real estate, but to receive it they would have to take actual title, not just buy a purchase and sale agreement , and the credit would not apply until the tax year following the taking of title.

Frankly, I’m not sure the City can do much else, Constitutionally, by way of taxes, without being foiled by legislative resistance or upended by seeing any such penalties backfire when the bull market ends — and as real estate bull markets are highly leveraged, when they turn, they do so on a dime and are followed by bear markets all the worse for having to navigate penalties as well as foreclosures. Of course right now there is no forseeable market turn, which is why City officials of good will — who see that even building 69,000 units of new housing isn’t close to enough — are trying their darndest to figure out how to tame the bull’s hooves and horns.

One last point : I speak only here of Downtown and its abutting neighborhoods. Population explosion has yet to impact outlying neighborhoods much, some not at all. As a result, voters in those areas — West Roxbury, Hyde Park, Oak Square, Mattapan, Blue Hill Avenue, Codman Square, for example — may wonder what all the fuss is about. Their disconnect from the Downtown vortex has almost created two seaparate cities, and that separation does not augur well for the City;s hope to work its way out of the bull market crush.

—- Mike Freedberg / Here and Sphere

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