Landlords are eating the world

By Leith van Onselen

Originally published on 10 September 2015

US economist, Noah Smith, has penned a good article at Bloomberg arguing that the rise in inequality across the developed world has not been caused by greedy corporates, but by hyper-inflation in land values, which has enriched land owners at the expense of everyone else:

There is growing concern that wealth inequality has skyrocketed, and that capital income accounts for a growing share of the economic pie. This was the theme of Thomas Piketty’s “Capital in the Twenty-First Century”… [But] we forget that land also is a form of capital, which means landlords (and homeowners) are capitalists, too… it is land, not corporate capital, that has been responsible for the lion’s share of the increase in capital’s share of income.

This increase is happening worldwide. A great report by the Economist showed that the share of residential property value as a percentage of gross domestic product has skyrocketed in European countries since 1950.

This is bad for the economy…

Regular readers will know that MB shares similar views and has penned many articles on the topic.

Even the Reserve Bank of Australia (RBA) belatedly conceded that Australia’s obsession with housing (read land) is not actually healthy for the economy and has merely robbed younger Australians of their future:

…our fascination with land, its value, and its financing has endured. In a way, it has become part of our national culture.

over recent decades, net wealth has increased at a faster rate than has GDP (Graph 1). Between 1989 and 2014, the nominal value of net wealth increased at an average pace of around 7 per cent per year, compared with an average increase in nominal GDP of around 6 per cent. While net wealth grew more slowly than GDP in the first half of the 1990s, for most of the time since it has grown more quickly than GDP.

Land is the asset class with the highest value. As at June 2014, it accounted for 34 per cent of the value of our national assets…


The most striking of these is the increase in the relative importance of land. Indeed, almost three-quarters of the increase in the ratio of net wealth to GDP since the late 1980s is explained by higher land prices…


Instead, almost all the increase has come from the higher value of the land upon which our dwellings are built in the towns and cities across Australia…


So it is arguable that the main impact of higher land prices is not really to increase our national wealth, but to change the distribution of that wealth…

The distributional effects are in two dimensions. The first is cross-sectional, with the existing owners of dwellings receiving capital gains when land prices increase. The second is the distribution of wealth across generations, with the current owners of dwellings earning capital gains but future generations paying higher housing costs.

…rising land and housing prices have made many, but not all, Australians better off. They have also changed the distribution of wealth within our society and between generations… real wealth generation for the society as a whole comes from asset accumulation and lifting our productivity.

Indeed, the latest household wealth data from the ABS shows that the escalation of housing values has materially worsened inequality in Australia:


Because poorer households hold very little property:


Accordingly, the poor have been left behind as property values skyrocketed:

Middle and high wealth households have experienced a real increase in average net worth over the past decade, since the collection of wealth data began in 2003–04. Middle wealth households had an average net worth of $462,500 in 2013–14 compared to $388,700 in 2003–04. High wealth households increased in real terms from an average net worth of $1.8 million in 2003–04 to $2.5 million in 2013–14. Low wealth households did not experience any real increase in net worth over this time period with the average net worth of $35,600 in 2013–14 similar to 2003-04 ($32,000).

So what can be done to redress the situation and reduce wealth inequality? Noah Smith offers two solutions:

One approach, advocated by the 19th century economist Henry George, is to tax the value of locations. Essentially, a Land Value Tax is a property levy with exemptions for development. This encourages construction and development, while reducing the cost that businesses have to pay to locate close to one another. Pennsylvania has long used a version of this tax, sometimes called a “split rate” property tax, with encouraging results. Another approach to reducing the cost of density involves reducing zoning and other building restrictions, essentially allowing developers to create more locations where people can live and gather.

Exactly. But don’t expect Australia’s rent-seeking landowners and politicians to implement policies that cut into their windfalls.