Why a house is worth less because it’s worth more

You know the old gag about how your house is making more money than you are? Well, I can go one better. My house isn’t just making more than I am, it’s making it at my expense. Because my property assessment just went up, so did my taxes, reducing the price a prospective buyer would pay. In short, my house is now worth less because it’s worth more. Government has a special magic all its own. If anyone else said my house was worth more, it would be. If Bill Gates said it. Or Avril Lavigne. Or the guy down at the corner singing the blues. “There is a house near Orleans that’s worth a rising sum...” Especially in his case, the effect would be small. But a few people might wonder if he’d heard something, so if his opinion had any impact at all, it would necessarily be favourable.

Unfortunately it wasn’t some hobo who said it. Instead, the Municipal Property Assessment Corporation (MPAC) declared my house value rose by one-sixth last year. That, incidentally, means it should double in five years. As you will be aware if you read your mail, yours probably did something similar. The average residential increase Ottawa-wide was 11.84 per cent, for a doubling in about seven years. What a boom town. Too bad the rise in property values is pushing house prices down.

Incidentally, MPAC is a classic case of “don’t look at me, I’m just a politician, politicians did this.” On the radio last week, I blamed the City of Ottawa for my assessment and someone promptly phoned to say it’s not us, it’s MPAC. And indeed, Sections 307 and 340 of Ontario’s Municipal Act, 2001 (and Section 37, clause 3 of the Assessment Act of 1990) legally oblige cities to use MPAC valuations. But the Municipal Property Assessment Corporation Act of 1997 says a majority of MPAC’s board members must be chosen from a list provided by the Association of Municipalities of Ontario. So the city didn’t do it, the province did, but the province didn’t, the cities did, but they didn’t the province did so shut up. But I digress.

My first reaction on seeing my valuation was, “Deal. Cut me a cheque.” I would sell it tomorrow for what they say it’s now worth. So, I expect, would half of you.

My second reaction was that the city should be legally obligated to buy it at the MPAC price. Unfortunately, my third reaction was that this solution would not work because it’s lopsided. (As is appealing to the same authority whose unfairness prompted the appeal.) It leaves the government as the sole actor in setting property values. Specifically, if implemented, it would quickly result in the authorities setting property values absurdly low and mill rates absurdly high, creating a system different in detail but just as arbitrary and confiscatory overall.

This realization frustrated me because I knew I was on to something. Then I hit on it: a solution that’s clean, simple and really would work.

A powerfully wholesome tension exists naturally in markets, where prices are set not by buyer or seller, but by both. Only if the price is at least as high as the seller thinks fair yet at least as low as the buyer thinks fair can a sale occur. Despite various exotic theories about consumers not really having minds, market pricing works and works automatically. Often, one genuinely cannot replicate such tension in the public sector. Most constitutional checks and balances are a necessary, but second-best, alternative. But in the case of municipal property taxes, it is not only possible, it’s easy. Here’s how.

Every year, you the property owner and a representative of the city reveal simultaneously before a neutral arbiter what you each think your property is worth. You then pay tax on the average (e.g. if you say $260,000 and they say $250,000, you pay on $255,000). But there’s a scrumptious catch. When you each reveal your estimate, the other has an automatic right of first refusal. As soon as the city names its price for your house, you can say “Sold.” But as soon as you name yours, they can say “Bought.”

It’s cheap and simple to administer, transparent and transparently fair. And note that right now, MPAC puts a price on your house that Donald Trump wouldn’t pay and you respond with one Ebenezer Scrooge would. But under my system, the city would almost invariably place a lower value on it than you do. Which is what happens when the universe is unfolding as it should. What’s unnatural is when someone insists that something you own is worth more than you think but won’t buy it from you.

My proposal does not solve all the problems of the universe or even that part labelled Ottawa Megacity. Not even the city’s chronic lack of money for reasons not entirely under its own control. But it does completely solve one big problem: a tax system unfair to residents and, by this point, a political liability for city officials who face an impotently furious populace prone to electoral volatility and rude letter-writing. It’s worth doing.

On the downside, if my idea is adopted, my house will be worth less. On the upside, I could then sell it for more.

[First published in the Ottawa Citizen]

ColumnsJohn Robson