Prop 13 is interesting.

As a real estate owner I am glad that it exists. My 1998 tax basis suits me just fine, thank you!

As a citizen of San Diego I wonder whether Prop 13 makes sense.

One of the things I have read about Prop 13 is that it can influence the growth of a city in a bad way. Since the city can’t raise taxes on existing homeowners they have more incentive to build new strip malls and new subdivisions. Can you say “Urban Sprawl?”

But then I read about people on the east coast (where property taxes HAVE increased significantly regardless of when the owner purchased) and how some people are being forced to sell because of the increased tax bite. That pretty well sucks!

One of the reasons Prop 13 was enacted was to prevent people on fixed incomes from being forced out of their homes due to rising taxes. That makes sense to me.

Another thing I have read is that Prop 13 (or similar law?) also applies to commercial property. Since tax re-appraisal only occurs when a property changes ownership, commercial property is rarely ever re-appraised. I think it is even possible to own commercial real estate inside a legal entity (LLC, corp, etc) and have new ownership take over the legal entity without triggering a re-appraisal of the real estate (because the property itself is still owned by the same legal entity).

Again, since the city can’t raise taxes on existing commercial real estate they are forced to promote new strip malls and subdivisions to build their tax base. More urban sprawl.

So, Prop 13 is an interesting nut to crack – if I were tasked with evaluating its continuation, I would start by looking at commercial property and how it is taxed.

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An example of how Prop 13 is perhaps too generous to existing property owners: Prop 13 also covers multi-unit residential properties – one of my friends has been buying San Diego apartments for almost 30 years now – she has a cashflow problem (ie, too much of it!!!) and buys another property every few years so she has something new to depreciate on her income taxes – part of her cashflow “problem” is that she is collecting 2007 rents and paying 1970 taxes – she could certainly afford to pay more property taxes on her many properties – again, if I were evaluating Prop 13 I would start with commercial property

I grew up in Dallas, went to school in Austin and worked in Houston so I am familiar with the cities you mention.

Texas is mostly flat so Texas cities can expand outward very easily. Just add another freeway circling the city and, presto, lots of new off-ramps for gas stations and strip malls and many square miles of land just waiting for new houses. This occurred several times during my childhood in Dallas.

San Diego is geographically constrained by the ocean and mountains as well as the Mexican border and Camp Pendleton. I think it was probably these constraints that forced urban planning to occur in San Diego – not Prop 13.

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In regards to Prop 13 keeping people planted in their houses, that is certainly true to some extent. I sold all of my investment real estate in San Diego but kept my personal residence, in part, because of Prop 13 and a 1998 tax basis.

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I have the perception that many people in San Diego buy real estate without including the cost of property taxes in their budget. They choose not to have taxes and insurance withheld in their mortgage payment (which they can barely afford) and then get shocked when the tax bill arrives in November.

Property tax of 1.1% on a $500K house is $5500/year or $458/month – ouch!

And the people that paid $800K – $1.4 mil for tract homes in North County? They are paying $8800/yr – $15,400/yr for the privilege of commuting in traffic hell on I-5 and I-15. That’s $733-1283/mo for just taxes and then, as you point out, they get to fork over $300-600/month for Mello-Roos. Some of them also have HOA fees to cover common areas of their development.

I’m ranting about North County tract homes so I’ll shut up now.

And the people that paid $800K – $1.4 mil for tract homes in North County? They are paying $8800/yr – $15,400/yr for the privilege of commuting in traffic hell on I-5 and I-15. That's $733-1283/mo for just taxes and then, as you point out, they get to fork over $300-600/month for Mello-Roos. Some of them also have HOA fees to cover common areas of their development.

Add to that car a payment on an SUV and gas, and you're at $2000/mo just in taxes and transportation.  

I mostly agree with bob007. In the grand scheme of home prices, prop 13 is a bit player.

However, I believe that it does suppress both the overall supply of homes and the pool of potential buyers by incentivizing people to stay in their low-cost-basis house rather than moving. This reduces the overall numbers on both the supply and demand side. This impacts the overall potential volume of sales, which is correlated with price.
But other factors are more important.