Real Estate

Detroit’s Rent Premium Woes: Mayor’s Tax Proposal Offers A Solution And Model For The Nation

Despite Detroit having the lowest home values of any metro in the country, Detroit renters still struggle with affordability. In fact, it costs 24% more to rent the typical home in the Detroit area than it does to buy it. That’s the biggest rent premium among the 50 most populous metro areas studied by Redfin. The high cost of rent is symptomatic of Detroit’s larger economic challenges. However, a new land value tax plan from Detroit’s mayor offers a promising solution that may provide a model for the nation.

More renters than potential homeowners

One reason renting is more expensive than buying a home in Detroit is that a high share of Detroit residents has no option but to rent. Although the price of a typical Detroit home is the lowest of any metro in the U.S., the criteria for a mortgage, such as a good credit score and a stable income, limits the pool of potential buyers. Detroit has witnessed a significant decline in its population, primarily among wealthier residents who could have qualified to own a home. As a consequence, the homeownership rate in Detroit is only 51% compared to the national homeownership rate of 66%. The low share of homeowners and high share of renters has put upward pressure on rental prices.

Weak home value growth

Even residents who could access homeownership may choose not to if they view homeownership in Detroit as a lousy investment. A home’s value may increase or decrease for two reasons, changes in the property’s value or land’s value. Concerning property, the value of the structure can fluctuate, with improvements enhancing its worth, while neglect diminishes its value. Concerning land, as a city grows more appealing to both residents and businesses, land value improves. In Detroit’s case, the city has grappled with population loss over the past seven decades, leading to economic decline and, more recently, an inconsistent economic recovery. While home values in Detroit have shown improvement since the Great Recession, they have failed to keep pace with the national average, which makes homeownership a risky investment. In addition, Detroit’s high property taxes further discourage homeownership and property development.

How this hurts tenants

The abundance of renters and the scarcity of potential homeowners in Detroit has created a scenario where landlords can charge a premium for rental properties. This rent premium exacerbates the affordability gap, affecting the finances of residents who are already struggling with other expenses. In the city of Detroit, 60% of renters are cost-burdened, meaning they spend more than 30% of their income on rent. For comparison, nationwide 50% of renters are cost burdened. Being cost-burdened makes it nearly impossible for renters to save for homeownership or other financial goals. It perpetuates the cycle of renting, making it even more challenging for individuals to save for homeownership and escape the burden of escalating rental costs.

Solutions: support homeownership, tax land

A multi-faceted approach is necessary to address the disparity between renting and homeownership costs in Detroit. Making homeownership more accessible and attractive should be a priority. First-time homebuyer assistance programs and lowering property taxes can alleviate the financial burden on potential buyers. However, this only helps renters on the cusp of being able to afford a home.

One way to help all of Detroit’s renters is to redistribute the income of landlords back to renters. The city could achieve this through a land value tax, whereby Detroit redistributes a portion of the collected rent or imputed rent from landowners back to the city. A land value tax can help the city fund programs which alleviate poverty and help renters. The mayor of Detroit already has plans to implement a land value tax

Unlike a property tax, a land value tax also encourages the development of more rental units while discouraging building neglect and vacancy. That’s because under a land value tax, owning a dilapidated home or empty lot is more expensive than developing housing on that land.

Implementing a land value tax in Detroit requires a law change at the state legislature. If Michigan legalizes this tax structure, more Michigan municipalities could experiment with land value taxes. Growing cities may pass a land value tax to encourage the development of housing units to accommodate more residents while raising tax revenue more efficiently. Unlike income, property, and sales tax, a land value tax supports sustainable economic growth. Detroit may be the most extreme example of a city that has been unable to sustain economic growth, so if a land value tax works in Detroit, more cities will likely follow suit.

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