The Forgotten Factor: Land Prices


John Young

In all the discussion about the economic crisis and its causes, the part played by land prices is nearly always underrated. The unique character of these prices is usually not even recognised.

I am not speaking of the price of the house or other improvements on a site, but of the site itself. A vacant block of land in a desired location may cost a fortune, without any contribution of the owner to the value. In this article I want to examine that question and note some of its consequences, particularly in relation to buying one’s own home and in relation to economic crises.

Think of two identical parcels of land, one in the outback, the other in the middle of a city. The second will be worth many times that of the former, mainly because of the advantages conferred by society on that site. There are physical amenities such as roads, water and electricity; there are social benefits such as schools, shops and the opportunities available for work and for mixing with other people.

The price of these two blocks, one in the outback, the other in the city, will be determined by such factors as the above, combined with the relative scarcity of city sites compared with those in the country. The price does not come from anything the owner does.

Yet in modern societies the benefits conferred by the community and by natural factors like climate, a beautiful view or valuable minerals (and by scarcity) flow to the owner. But he did nothing to deserve them!

Look at the plight of young people struggling to save enough to buy a house and land. In Sydney particularly, but in all our cities to a lesser extent, it is often impossible. This is not primarily because houses are expensive, but because the land is expensive.

It is usually necessary to borrow so much that the borrower will be in bondage to the lender for many years, and will eventually pay far more in interest than the house and land originally cost.

Then there’s the matter of land speculation. As the demand increases, the price rises. Speculators move in, driving the price higher still. They borrow to buy more land, and the gambling instinct forces the price to unsustainable levels. Then comes the bust.

The British writer and economist Fred Harrison, among others, has charted the part of land prices in recessions. His book The Power in the Land, published in 1983, studied the onset of depressions and how they were preceded by the collapse of land prices which had reached unsustainable levels. His more recent book, Boom Bust, published in 2005, predicts a major depression in the year 2010. Its subtitle is House prices, banking and the depression of 2010.

There is a saying about land: They don’t make it anymore. If the price of, say, furniture rises in relation to production costs, this results in more furniture being produced because of the attraction of the better return to producers. Competition then brings the price down. But land can’t be manufactured, so the price tends to increase until people simply can’t afford to buy. Then comes the crash, with accompanying bankruptcies, unemployment and panic.

The first homebuyers grant is supposed to ease the situation for people struggling to buy a home site. But because of the monopoly character of site prices an inevitable effect is to increase prices further, with the extra money from the grant stimulating demand. It was reported recently that localities where first homebuyers have been particularly active have seen a disproportionate rise in prices. This means that the recipients of the grants are getting less than the full amount and those buyers not receiving grants are worse off than if the grants had never been given.

So what should be done? I’m convinced that the solution has been known for a long time. It was first fully presented by the American economist Henry George in his book Progress and Poverty, published in 1879. His position was accepted by, among many others, Winston Churchill in England and Sun Yat-Sen in China. It was a plank in the Australian Labor Party platform until fairly recent years.

The solution is for the government to impose a levy on the unimproved value of land. The higher the levy the lower will be the selling price of the land, because potential buyers will know they will have to pay that levy each year. So the land will be worth less to them than under our present system.

With this method in full operation land would be cheap and speculation would be eliminated. What would be the point of speculating on a rise in site prices if it was known that further increases in the site’s value would be captured by the government?

People would buy land at a small percentage of current prices, and therefore would need much lower mortgages – if any. Money that now rewards people for something they did not provide would go into public revenue, making it possible to reduce taxes. The fortunes available to the fortunate and the wealthy from this source would be no more. The power of the banks over the lives of those they currently hold in bondage would no longer be great.

An interesting fact about this form of revenue raising is that it reduces the price of the thing. Whereas taxes increase the price of the object taxed, the taking of site revenue by the government causes the price of land to fall.

But would this system be just? People who own land, particularly their home site, have laboured for years to achieve this. Imagine their situation if their land drops dramatically in value, and they have to pay land revenue to the government as well. They may have intended to pass on the property to their children, but this alleged reform would reduce the value to a small percentage of what it had been.
A first response is that the very great advantages to society would justify some disadvantage to current landowners. But the disadvantages need not be great, except for some rich landowners with millions invested in land. For one thing, the taking of land revenue by the government would be introduced gradually – it would be politically impossible to do otherwise.

The owners would gain in other ways. Taxes would be reduced, being replaced by this revenue. The more stable economy would benefit all. Land would be far cheaper to buy; and that must be of immense benefit to the children of people who had planned to help their children through the sale of land: the children would usually do better buying land at a small proportion of what its price would be under the current system than being helped (under the current system) by the sale of their parents’ property.

Besides this, concessions should be given in the early period of such a changeover to people who would otherwise experience serious difficulties.

The fundamental reason for implementing this reform is because it is just. Today wealth belonging by right to the community is appropriated by those with no valid claim to it. This in turn leads to the economic distortions and boom and bust conditions that plague society.

This is certain: without appreciating the land question it is impossible to diagnose our economic woes adequately, including the current recession. So even a person who thought it is too late to change the status quo should at least try to see the consequences of the present system.

We should try, therefore, to understand the situation and help to promote a saner approach to land values. A start is to advocate the greater collection by local governments of revenue based on the unimproved value of land. Unfortunately, in recent years local governments have moved away from that practice, and they have also applied it badly – as when introducing sudden big increases.

I’ll finish with an example. A few years ago the Jubilee Line on the London Underground was extended, at a cost of 3.5 billion pounds. Don Riley, in his book Taken for a Ride, estimates that the extension caused a rise of 13 billion pounds in land values. Had this been captured as government revenue it would have paid several times over for the work, without costing the taxpayers or train travellers anything.

John Young is a Melbourne writer on philosophical, theological and economic questions. His recent book ‘The Scope of Philosophy’ is available from the Freedom Publishing Bookroom.

7 Comments

  1. Supra Omnis12-06-2009

    The article started out strongly, until the introduction of Henry George (Churchhill was an alcoholic!).

    Do you not identify that government manipulation of the free-market is responsible for false valuation? and your solution is based on another form of government manipulation???

    The free-market corrects speculative rises – it’s called recession. During a recession, if the government avoids further manipulation through flawed Keynesian theory, it would not be compounded if ‘stimulus’ is avoided – as ‘stimulus’ is simply paid for by tax-payer debt which has to be serviced through higher taxes whilst trying to kick-start the economy at the same time – it doesn’t help anyone. Lower taxes allow economies to flourish, not ‘stimulus’.

    Freedom over collectivism.
    Capitalism over Socialism.

  2. Karl Fitzgerald
    Karl Fitzgerald12-06-2009

    Hi Supra,

    Churchill probably became an alcoholic because he knew how the people were being played as pawns via the privatisation of publicly created ground rent. The free market delivers free lunch to owners of prime locations due to scarcity rents. Did that person do anything to earn the massive upkick in land values? As you say in Oz, yes govt interference in the market (FHOG) is a problem. Govt refusal to harness the economic rent as per the wishes of Adam Smith, Ricardo, JS MIll and yes, Henry George, allowed the land based bubble to outstrip wages by what %? Thats the bigger picture.

    How is affordability going in Sydney?

    By capturing this land bounty we can remove the deadweight taxes & compliance costs that inefficient revenue raising mechanisms such as GST, payroll, stamp duty and even income tax impose on productive entrepreneurs. Our tax system is full of magnetic loopholes for speculators rather than entrepreneurs. Is the pain the underemployed are feeling worth it?

    Perhaps you could watch MIchael Hudson on economic rent.
    Also read Gavin Putland’s work over at LVRG, including his latest on Recessions Begin at Home to understand these points in more detail.

  3. Bryan Kavanagh13-06-2009

    “Supra Omnis” may be correct about problems brought about by unnecessary government intervention, but obviously does not understand the so-called land market. It’s not a market at all – until a far greater proportion of the publicly-generated annual rent of each site is taken for the public purse (instead of taxes).

    Otherwise, speculators and monoploists will sit on vacant land until a land-hungry community has to meet their blackmail prices. Capture more rent and you’ll create a genuine land market, because land prices will tend to decline as such people are driven out of the market. Nor could we then experience worldwide these bubbles in land prices that burst and bring on recession and depression.

    But I don’t expect to convince, “Super Omnis” because logic is clearly not his/her strong suit: “Churchill was an alcoholic!” means that he was totally incompetent? Churchill, of course, proves that some alcoholics remain contributors to society.

  4. Jim Cavill07-07-2009

    Actually all the points made above have merit to some degree but.. one thing about land is its a limited resource and will have the same boom/bust cycles as the market based economy has this is the basis of supply/demand. This cannot be circumvented except by strict economy regulated government control in which case you become socialist and that is proven not to work as well, you cant mixmaster it as has been tried and failed. As to the artificial inflation of pricing this is actually due to government interference anyway so perhaps a new way is needed.

  5. Keith13-09-2009

    When I selected this item, I thought it might have something to say about the treatment of land pricing within the CPI. Land is excluded supposedly because it can’t be consumed. This is obviously wrong (at least to anyone with a farming background). Yet land “value” has everything to do with taxation. This might be the nexus of govt manipulation. A situation where govt decides the value will always be fraught with political ideology. Such a system could enable starvation as an extreme possibility (eg a farmer improves his land, and govt increases the levy – great system ! (not)).

  6. Nick Marshall07-10-2009

    We already have land tax in Queensland on aggregate unimproved value above $600k. Ireland has experimented with wealth/property taxes several times over the last 30 years only to see property prices rise exponentially in the decade from 1996. The idea that government will lower other taxes because of the revenue raised from property tax is laughable. Governments simply waste money as they are doing now with the extraordinary levels of stimulus spending. If governments wanted a re-set of property prices so that younger people would only have to outlay a maximum of 3 times annual average wages/salary for homes, then they would abandon Ist home owner grants, restore the capital gains tax and price indexation and allow interest cost deduction. Stamp duty would be removed from property transactions but local councils would be allowed to capture a part of the revaluation that accompanies rezoning. A typical example of unearned gain has recently happened in my town whereby a 5 acre nursery was rezoned with plannng approval. This property was sold to a developer for $4 million who was using Federal “affordable housing” development funds to make the purchase. The out of town developer signed on the contract without negotiation on the price despite the best offer from the two biggest developers in town offering less than $3 million previously. The local council will be responsible for all the extra infrastructure required but only gain an increased annual rate base for the 100+ apartments replacing a nursery and single dwelling rate. In addition, the property was originally purchased for about $100k just prior to September 1985 so capital gains is foregone. In other words, local ratepayers will be subsidising the lucky vendor’s gain. This happens all over Australia all the time and must partly explain why infrastructure in regional towns like Cairns is under so much pressure. I am not in favour of taxes for re-distributing wealth per se but clearly we would not have a functioning 1st world society with out some form of contribution. To that end, taxes should be levied and spent at the local level. Especially in Australia where most tax is raised from the regions (resources) but spent in the metropololis where the voter concentration is greatest.It has recently been calculated that Nth Qld has been short changed $12 billion over the last decade by state and federal governments.

  7. Anne Schmid13-10-2009

    Nick your examples show clearly that we must get to the source of the problem if we are serious about a cohesive economy. We maintain that we must educate people to see the benefits of government revenue sourced from land and natural resources with a reduction on other forms of taxation. The sound base for a land tax would help to bring responsibility back into government. It is not the role of government to grant privileges to sectional interests but to govern for all people. I note your skepticism but we must continue to work for justice.

    There are many studies that show that a land tax invigorates the community. See our websites.
    Land is a forgotten factor in the sense that society does not adequately discuss land issues . We continually see headings such as “Hut without a roof sold for $2million” The GFC is explained without acknowledging the dominance of the land factor. Economic and social issues are discussed as though there is nothing that can be done about the price of land or the lack of infrastructure in our growth areas. These issues need a real airing. Will the Henry Review into Taxation seriously consider a land tax? And if it does will the Federal Government carry out the recommendations? More than likely the usual preferred option which is to placate the land lobby with a minimal consideration of land tax will take place. When do you last see representatives from Prosper Australia and the Land Values Research Group being given an opportunity to give the land angle in our media, and yet workable land management is essential to our economic health.

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