Permanently Increase Economic Growth

Part 13 of... "6 Tax Breaks Landlords Get that Hurt the Economy and You"

Jun 24, 2021

If, because of the landlord tax breaks, house prices increase and buyers’ monthly mortgage payments increase, say, $100 per month, that’s $100 per month those live-in house owners won’t be spending on goods and services that create jobs for the next 30 years.

A 10% Multiplier?

Subsidizing landlord owners with tax breaks lets landlords pay more for their rental houses so they bid up prices for all single-family houses and condos. The live-in owners who pay those higher prices have less money to spend in the rest of the economy which slows economic growth.

That’s because when someone spends $1 toward buying a house that was built years or decades ago, that creates a lot fewer jobs today than if they had spent that same $1 toward buying services and goods produced today, that create jobs today.

The economic multiplier is a lot higher when people buy services or new things instead of buying things made decades ago.

Of course, when people buy existing houses some of the money goes to pay real estate agents, title, escrow and mortgage companies, etc. today which sets off a chain of new spending and economic growth. Let’s say the equivalent of 10% of the house price goes to pay them.

But that would mean 90% of the money spent on existing house sales doesn’t create new work in the current economy and, dollar for dollar, buying an existing house has a LOT less impact on generating additional spending and economic growth than buying most goods and services.

About 90% of the money went to changing the ownership of the house, it didn’t pay people for work they performed in today’s economy. That 90% didn’t grow today’s economy.

Artificially created house price increases suck money out of the real, productive economy and decrease economic growth.

Economic Inequality

Since landlord tax breaks unnecessarily increase house prices, they hurt those who don’t already own houses and that increases economic inequality. It makes it harder for groups that have below-average homeownership to catch up.

To make matters worse, landlord tax breaks lower home ownership, overall. The percentage of occupied single-family houses that are landlord-owned, increased 20% from 2000 to 2019 (from 13.2% to 15.8%)… and, of course, the primary-home ownership rate fell at the same time.

Increased Economic Fragility

Earlier I mentioned that housing’s fixed supply makes it extremely prone to large booms and busts. Since landlord tax breaks cause landlords to make more money, there are more landlords and they buy more houses during those house price booms than they would otherwise. When they see the values of their current rental houses increasing fast, they love those investments, and tend to jump into the market and buy more houses. That makes real estate booms bigger.

Live-in owners can only live in one house at a time so when house prices boom they don’t buy more houses.
However, ALL current landlords – and potential landlords – can buy more houses when house prices boom which, in turn, causes house prices to boom even more.

On the downside – and more importantly – landlord owners are more likely to walk away from houses they don’t live in when prices fall and they’re underwater. That makes price busts much worse.

Overall, house purchases and sales from live-in owners are much more stable than house purchases and sales from landlord owners.

2007

In the 2000s real estate bust, it was the investors who bought at the top of the market with high-foreclosure loans (liars loans, neg-am, etc.) who were the first to walk away and start the cascade of foreclosures. Fewer landlord foreclosures early on would have delayed the entire cascade of foreclosures, prices would have fallen much less, and the total number of foreclosures would have ended up being much smaller.

The government pays to destabilize house prices.

Government policies that essentially pay landlords – who can jump into and out of the market a lot more easily the live-in owners – destabilize house prices on both the upside and downside. And that destabilizes the economy and family wealth. In addition, recessions following real estate booms and busts tend to be the deepest and longest.

Is that fair?

The Future?

If those tax distortions are removed, single-family house and condo prices would increase more slowly but more steadily. People would spend, save and invest more, and more steadily. Some recessions wouldn’t be as deep.

Removing landlord tax giveaways would increase economic growth permanently. It would also stabilize house prices, the economy, and family wealth creation.

More money would be spent in today's real, job-creating economy instead of on houses built years ago. A small shift of money away from houses built years ago and toward things being made today would have a big impact on today's job-creating economy.

U.S. economic growth would be larger every year, year after year. People will have a bit more money in their pockets every year, year after year. And that economic growth and income growth would be much more stable than currently.

Don’t artificially increase house prices.