Home    Property taxes stunt Chicago’s house price growth

When Melissa Dwarneke and her husband decided to sell their five-bedroom house in Chicago last year and rent instead, the plan was to rethink their asset portfolio, take a pause and see where the market was heading.

But Dwarneke, who works for a global consulting company, says that one big reason for scaling down was property tax, which had risen on their historic home in the city’s desirable Lincoln Park neighbourhood, from about $10,000 a year when they bought it in 2010 to more than $15,000 last year.

“It was a huge motivating factor in selling,” she says. “Property taxes are a big concern for everyone here and not knowing where they’re heading creates a lot of frustration.”

On paper, Chicago is a real estate dream: the city’s 77 areas offer historic homes on a scale unparalleled in just about any other US city. Meanwhile, the downtown area known as the Loop contains some of the most spectacular high-rise architecture anywhere in the world.

But for all that, agents and brokers say the seemingly relentless increase in Chicago’s property taxes in recent years is one of several factors sucking dynamism from the market, which has long struggled to keep pace with other leading US metropolitan areas, such as New York and San Francisco.

Bryce Hill, research analyst at the independent Illinois Policy think-tank, says that the annual property-tax take in Cook County, which includes Chicago, increased 76 per cent more than median home values between 1996 and 2016.

“Both the city and the state are wrestling with unbalanced budgets, massive amounts of pension debt, and limited solutions,” he says. “As they fight these worsening financial conditions, businesses and homeowners have been saddled with high property taxes that far outpace growth in property values.”

Until last year, homeowners in Chicago could write off property taxes against their taxable income. But President Donald Trump’s 2018 reform establishes a $10,000 cap, leaving many homeowners suddenly forking out huge sums. “It has really put the brakes on sales,” says Nicholas Apostal, a principal broker at Keller Williams in Chicago.

Apostal is listing a fully renovated 19th-century brownstone in Lincoln Park with five bedrooms and four bathrooms. The $1.45m sales tag is far below the pricier markets of New York and San Francisco, but it comes with annual property taxes of just under $22,000 — and no guarantee that they will not increase in years to come.

Two-bedroom apartment on N Michigan Avenue, $1.995m © VHT Studios

In the meantime, he says, thousands of new, high-end rental units have come to market in downtown Chicago, making buying property in the city even less attractive. “The pace of new construction for rental properties is staggering,” he says. “The idea that you are not going to be living in a nice place because you are renting is not true any more.”

Javier Vivas, director of economic research at property listings website Realtor.com, says that the outlook for Chicago this year is one of the worst among the major US metropolitan areas. “We generally look at two metrics: one is sales volume and the other is home prices,” he says. “We are expecting declines in both.”

Home prices increased 1.9 per cent in the 12 months to April, according to the S&P CoreLogic Case-Shiller Index. That compares with 3.5 per cent nationally. Chicago has been at or near the bottom of the 20 biggest US cities in terms of price growth for the past two years.

Beyond taxes, Ralph McLaughlin, deputy chief economist at CoreLogic, which compiles the index, says that Chicago’s housing market suffers from population drain, which has afflicted the city for the past four years — and Illinois for longer.

“Population is one of the key economic drivers of whether house prices rise or fall,” he says. “It’s very hard for house prices to grow if there are more people leaving than arriving.”

In April, house prices across the US were nearly 13 per cent above their pre-crisis peak in 2006, according to CoreLogic. In Chicago, they were still 14 per cent below that peak.

House & Home Unlocked

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Jim Miller of Jameson Sotheby’s International Realty points out that overall numbers hide the complexity of Chicago’s property market, the dynamics of which operate at the neighbourhood level. For example, he says home values in the city centre, with its Art Deco high-rises, were growing at 10 per cent a year until last year. But the city’s North Side, which comprises areas such as Lake View, Lincoln Park and Logan Square, has spent the last few years grinding through a downturn. “It’s hyperlocal,” Miller says.

Sotheby’s is listing a Victorian four-bedroom, three-bathroom home in Lincoln Park for $2.2m. For $5.5m, it has a six-bedroom, 10,000 sq ft 19th-century home in Lincoln Park. At 800 N Michigan Avenue, @Properties is marketing a two-bedroom apartment for $1.995m.

However, few people are prepared to buy luxury homes just because they fall in love with them, says Miller. A lot of homes in Chicago are selling at 2003 or 2004 prices, he adds.

Buying guide

Illinois has among the highest property taxes in the US, with an average rate of 2.32 per cent of assessed value. A report released last month by the Cook County clerk’s office shows that homeowners in the north and central areas of Chicago will see 2018 property taxes increase by an average of 11 per cent over the year beforeViolent crime is higher in Chicago than most other major US cities. The murder rate peaked in 2016, when 762 people were killed, but decreased to 561 last year

What you can buy for . . .

$350,000 A two-bedroom apartment in Gold Coast
$1.75m A four-bedroom townhouse in Lincoln Park
$10m A new five-bedroom penthouse with views over Lake Michigan

More at propertylistings.ft.com

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