Land: The Boom That Really Hurts
[Reprinted from Fortune, June 1973]
The worst case of inflation isn't that stuff on your plate; it's that
stuff under your house. Prices of land, the indispensable resource,
have been for several decades in a steep worldwide rise, outstripping
the cost of food, of buildings, of labor, of machinery, of factory
products. In the last fifteen years the average price of land in the
U.S. has risen at a rate of about 7 percent a year. Over the same
period the consumer price index rose at an average rate of 2.7
The land boom seems to be good for landholders, who in the U.S. are
the majority of families. But perhaps even those who own modest
parcels suffer more from the indirect effects of the land boom than
they benefit from the inflated value of their property. Directly or
indirectly, the price of land enters into the cost of everything. It
is also an element in the pathological condition of cities. Developers
bypass expensive, idle land in favor of loss dear tracts farther out.
Low population densities on the metropolitan peripheries make mass
transport uneconomical and foster the one-person, one-car pattern,
wasteful of energy and raw materials. The cities themselves -
pock-marked by parking lots, leprous with dilapidated buildings --
lose their urbanity and their social vigor. Though government has
poured billions into the cities, the rot does not stop.
Nor will it stop as long as land prices continue to run ahead of
solid economic reality. The land market is stimulated by one belief --
exaggerated everywhere and absurd in the U.S. -- that population
growth is pressing hard against a limited supply of land. It is
further stimulated by public attitudes, transmitted from the distant
past, that hold land in higher esteem than other kinds of assets.
Public policy has no power to dissolve such popular myths. But public
policy itself contributes to the land boom by giving land a tax
advantage over buildings and other assets, by allowing gross abuses in
the way some land peddlers operate, and by failing to develop positive
programs that would increase the effective supply of land.
The combined effect of popular myth and sluggish public policy is
that when eager buyers come to the land market, they find reluctant
sellers. And the price of inert and insensate acres rises faster than
anything else in a civilization where the real economic values derive
from action, from knowledge, from judgment, from management, from
invention, and from cooperation among people.
"The most important fact of life"
Consider some specifics. In downtown Atlanta, land that went for $20
a square foot ten years ago, when the city was already booming, has
now risen to $120 a square foot. In Chicago, land for industrial
development has risen at about 10 or 12 percent a year. In southern
Florida, suburban land has gone up 600 percent in ten years in the
last eighteen months alone prices have doubled. So ingrained is the
belief that land prices will continue to rise that some Florida REITS
(real-estate investment trusts) arrange mortgages for more than the
purchase price -- an example of financial ebullience unmatched even by
brokers' loans in the 1929 stock market.
In New Hampshire, land prices have been increasing more than 20
percent a year. From Maine, a correspondent wires that spiraling land
costs are the state's most important economic fact of life." The
Tax Foundation of Hawaii figures that since 1965 land prices have
increased by 97 percent on Oahu, 185 percent on Maui, 218 percent on
the Big Island (Hawaii), and 282 percent on Kauai. And one can find
less extreme but nonetheless hair-raising real-estate prices in almost
any part of the U.S.
This country, however, is far from the head of the parade of
land-price increases. In the center of Lyons, in France, land prices
have increased sixfold since 1962. In London today, you can buy for
$100,000 a "maisonette" (i.e., a cubbyhole with stairs) that
a career girl in New York would have turned down twenty years ago if
it had been offered for $90 a month rent. A small lot around Zurich or
Geneva can fetch $100,000 today. Ireland, as everyone knows, is a poor
country, but choice office space in Dublin's Fitzwilliam Square can
cost $300.000 for a Georgian building with 5,000 square feet, up 100
percent in the past year. In New Delhi, residential land brings as
much as ten times its 1959 price, and commercial land as much as
When the hedge fuels the furnace
As people all over the world talk about such examples, they often
solemnly aver that land is the best hedge against inflation. And so,
for a generation, it has been. But hedges can be cut and dried and
used as fuel. The land boom itself is one of the main causes of the
inflation that bedevils almost every country on earth.
Most discussions of inflation center the blame on the fiscal and
monetary policies of governments, which are quite properly held
responsible for maintaining the stability of the currency. But one
cannot help noticing that, though governments of different countries
follow a wide variety of budgetary and monetary policies, virtually no
economy is free from inflation. Is it a coincidence that nearly all
countries have taxation policies that favor land, especially
Undue union power to raise wages is also blamed for inflation. The
U.S. public is justifiably indignant at what building-trade unions
have done to construction costs. But in many parts of the U.S. over
the last fifteen years, prices of housing sites have risen faster than
the cost of on-site labor. Inflation occurs in Britain, where unions
are strong, and in Japan, where unions are less inclined to drive
wages up by prolonged strikes. What is very strong in both countries
-- and everywhere else - is a land boom that expands the credit base
while it pushes up the cost of goods and services. Whether the know it
or not, people are always buying the use of land. The consumer, for
instance, is vividly aware of the price of beef, but usually unaware
that land eaters into the costs of ranchers, feedlot operators,
packers, and butchers.
At today's prices, privately owned land makes up at least 20 percent
of all the tangible assets in the U.S.., a value greater by far than
that of all our boasted industrial equipment. When an element as
economically ubiquitous as land continues for years to surge ahead in
price, the effects are bound to appear in all other categories of
goods and services.
An imagined scarcity
When this point is made in conversation, somebody says, with a
resigned shrug, that nothing can be done about it because land has
become so scarce under the pressure of increasing numbers of people.
Indeed, the phrase "population explosion" still lingers
among us. In some parts of the world, it is true, sharply declining
death rates have so rapidly increased the numbers of people that the
term "explosion" has a color of reality. But in most
advanced industrial countries, birth rates began to decline a
generation or two after the modern decline in death rates began. In
the U.S., birth rates started to drop in the late nineteenth century,
and the down-trend resumed at the end of the 1950's after a
fifteen-year interval of higher birth rates. This fifteen-year period
now appears to be a postwar and postdepression aberration in the basic
long-range downtrend. Alarmists, however, projected the higher rates
of those years into a myth that the U.S. was running out of space.
Even people who know that the U.S. population is not exploding are
nevertheless impressed by the proposition that any increase in
population inevitably raises the price of land, because the quantity
of land cannot be expanded. But this view of the supply side crudely
assumes that patterns of land use cannot become more efficient. That
assumption is nonsense. More land is used for farming than for any
other purpose, and in the U.S., yields per acre have for decades been
rising much faster than the population. In consequence, parts of many
farms have been allowed to revert to brush while the acres still in
use produce more than the whole farm formerly did. Logically, the "retired"
acres should have a depressing market effect like that of unused
machinery. But this newly surplus land has not, in fact, held down
Many Americans have become so accustomed to thinking of their country
as packed with people that they fail to note the increased supply of
land. Traffic jams and pollution are taken as evidence of the
inexorable pressure of people on living space. But that can't be the
correct explanation of all those specific examples of "crowding."
The land-people ratio of the U.S. is eleven acres per person.
Excluding Alaska and all government owned land, it still works out at
more than five acres per person. If the whole present population of
the world -- all 3.7 billion people -- were put inside U.S. borders,
the resulting density would be not much greater than that of England
today. The most urbanized U.S. state, New Jersey, is 75 percent rural
Surprisingly, Rhode Island has the highest ratio of forest to total
land of any state except Alaska.
Nevertheless, and indubitably, crowding exists as one of the salient
characteristics of U.S. life. One reason, of course, is that people
are very unevenly distributed across the landscape. The twenty largest
metropolitan areas, which contain 32 percent of the total population,
take up less than 2 percent of the land. But when we perceive crowding
as the inevitable consequence of population density, we distract
attention from the real causes. These lie in the failure of our social
arrangements to keep in step with basic trends in society. Traffic
jams, after all, occur in the Micronesian islands with only a few
hundred cars. Congestive clots of all sorts appear in the vast and
almost empty spaces of Canada, Australia, Siberia. With such examples
of bad social arrangements, it requires specific analysis to see what
is wrong and what can he done. The verdict "too many people"
is mostly a way of running away from problems. Solutions will usually
be available from the same source that largely created the
All over the world people flow into metropolitan areas. The
technological and organizational advances that prompt and support this
tide magnify many times the space needed per capita. Each person, more
mobile than his ancestors, moves in a mass-and-energy bubble much
bigger than he is. But the increased need for space isn't modernity's
only effect on the people-to-land ratio. Technology also expands the
number of good sites potentially available. It does so not only by
increasing crop yields, but also by opening up access to vast tracts
of land that can be upgraded to more intensive uses. Cities no longer
need to be located on navigable rivers or in the middle of farming
districts. They can be built in mountains, on small islands --
anywhere amenity suggests. Air conditioning makes hot climates
attractive. (Without it what would be Houston's future?) Television,
despite all its disappointments, does admit millions to a rialto that
occupies little space.
Two kinds of land hunger
The expanded potential of land supply, however, is generally
overlooked in a market where attention is fixed on rising demand. Land
does indeed become a more important consumer good in societies beset
by unresolved problems of noise, crime, congestion, and urban
ugliness. People who can afford it buy rural space in order to pursue
life styles not possible in urban settings as now organized.
But to such consumer preferences is added another kind of land
hunger, a hangover from the past. For centuries land was the main --
almost the sole -- basis of wealth and security. Before
industrialization and technology demonstrated how rapidly human
productivity could be increased, the acquisition of land was the main
avenue of progress, for individuals and for nations. The land hunger
that brought millions to the Americas was firmly rooted in the
economic, political, and social realities of a time when only land
counted. Farmers then would feud or go to court in disputes over tiny
areas, and nations could go to war over slivers of land that a healthy
man could walk across in a few hours.
In international politics, land hunger continued to disrupt the peace
long after a valid reason for it had disappeared. Hitler and many
Germans of his generation felt that they were doomed to stagnation,
frustration, and humiliation unless they acquired more living space.
The obscene heart of World War II's tragedy was that the drive for
lebenstraum had become unreal, anachronistic, irrelevant to the actual
facts and trends of the twentieth century. The Postwar West Germans,
in an area little more than half as large as 1933 Germany, have
attained a per capita real income three times as high as when Hitler
came to power. The postwar Japanese, deprived of huge colonial areas
that their prewar leaders thought they needed, have advanced much
faster than those leaders deemed possible.
Aggression against neighbors isn't the only mistake a nation can make
when it feels overcrowded. In Great Britain the widespread belief that
there are "too many people" has undercut national morale and
served as an excuse for the lack of vigorous economic growth. Drastic
land-use laws, on the hooks for a generation, have not notably reduced
specific instances of crowding. Instead, legal restrictions on the
supply of land have pushed up land prices. The artificial scarcity
thus created in the market seems to confirm the popular belief that
there just isn't enough land.
In the U.S., too, a set of values left over from the past remains a
factor in the land market. For the prosperous American who feels
crowded or rootless or both, tradition suggests that what he needs is
land of his own. So he buys ten acres of poison ivy in Maine that he
will visit for three weeks a year. Why not? Everybody knows you can't
lose money in land, and the local taxes are peanuts.
The gold in vacant lots
Farmers, though dwindling in number, still own most of the U.S.
acreage in private hands. The market price of their land has been
increasing so rapidly that these days a great many U.S. farmers can be
counted among the rich in terms of net worth. Many of them do very
well in after-tax income, too. They have so many loopholes available
to them that the most important buildings on farms seem to be the tax
The most rapid increases in farmland prices have occurred near the
peripheries of metropolitan areas; Interestingly, the price of such
land jumps long before land inside motropolitan areas is built up.
According to one estimate, half of the land inside metropolitan areas
is still vacant -- and far more than half is underutilized.
When Allen D. Manvel did a study of U.S. land prices between 1956 and
1966, he found the sharpest rate of rise in the category "vacant
lots." During that period, when the consumer price index showed
an average rise of only 1.8 per-cent a year, vacant lots rose at 7.6
percent, "farms and acreage" at 6.1 percent, "commercial
and industrial" land at 6.7 percent, and land under single-family
homes in metropolitan areas at 7.5 percent. Since 1966, all categories
have probably risen faster than in the decade covered by Manvel's
His survey, probably the best overall picture of U.S. land prices
ever put together, was done for the National Commission on Urban
Problems, headed by former U.S. Senator Paul H. Douglas. A four-member
minority of that commission, including Douglas, signed a supplemental
report putting great stress on the need to reverse policies that tax
buildings too heavily and land itself too lightly. Manvel's study had
estimated that between 1956 and 1966 nonpublic land in the U.S. rose
in value from $269 billion to $523 billion. Douglas and his three
colleagues commented: "The owners of the land received these
enormous gains without strain or effort on their part.
Progress of society created these values; the owners of the land
Someone once classified incomes into three
divisions: earnings, findings and stealings. This enormous increase in
land values is most certainly not a stealing, and we want to make it
crystal clear that we do not regard it as such. Men of the purest
character have shared in these gains without loss of virtue. But if
these gains are not a stealing, they are also most certainly not an
earning, They are instead almost a pure finding."
This sweeping generalization ignores a small but significant
exception. The assembly of tracts for large-scale use sometimes
requires years of patient holding; in such cases the assembler, who
has in mind conversion to a more productive use, can be said to have "earned"
the incremental value.
Lots of mini-Astors
Douglas' indignation does touch the nerve of public aversion to land
speculation. From colonial times onward, speculation in American land
has been widespread -- and unpopular among nonspeculators. A sobering
truth is that a startling proportion of the great U.S. land gamblers
went broke. Robert Morris, "the financier of the Revolution,"
once headed a group holding, with money borrowed from otherwise sane
Dutch bankers, five million acres of New York State -- more land than
the market could digest. Morris died destitute, and his chief partner
died in a debtors' prison. Their melancholy story was repeated
generation after generation as successive land booms led to busts.
Some conspicuous fortunes made on U.S. land in the past did not derive
from speculation in this active sense. The Astors put profits from
other kinds of enterprise into land. They did not borrow to purchase
land. They simply held -- in some cases for well over a century.
In general, land ownership in the U.S. is not highly concentrated.
Nor is much U.S. land in the hands of speculators expecting to make a
quick buck. We have few Robert Morrises, but millions and millions of
would-be mini-Astors. Those millions of landowners are content to sit
on their titles while the economy grows around their property. The tax
structure encourages landholders to sit tight.
The main tax directly affecting land is the real-estate tax, levied
by local governments. On average, 70 percent of real-estate taxes are
assessed against buildings, 30 percent against land. The tax emphasis
sets up a disincentive against improving real estate by new
construction or renovation. It also sets up an incentive to hold
unimproved land off the market, thus creating an artificial shortage.
A decrease in the tax on buildings together with an increase of the
tax on land might have the long-range effect of slowing down the land
The tax advantage given to land has become more and more important as
the level of total taxes has risen. In 1927 all taxes -- federal,
state, and local - took 9.8 percent of gross national product. Taxes
on real estate (land and structures) came to almost exactly half the
total, or 4.9 percent of G.N.P. By 1971 total taxes had risen to 26.5
percent of G.N.P. But real-estate taxes had dropped in relative impact
to 13.6 percent of all taxes, or 3.6 percent of G.N.P.
As the level of total taxation has risen over the years,
considerations of relative tax advantage become increasingly important
in all decisions of whether to buy or not to buy, to sell or not to
sell. In such a context, the shift of relative tax impact away from
land confers upon land an artificial "value" that is one of
the main stimulators of the land boom. The supply of land actually
sold is limited because the owners know that the tax cost of holding
land is lower than the tax cost of holding other kinds of assets they
might acquire with money they would get from selling the land. Many
landholders don't even think of the "opportunity cost," the
income foregone by holding land that is not producing revenue.
This special advantage enjoyed by landowners" is right in
keeping with the tendency of all twentieth-century tax systems to
shoot anything that moves, and to spare anything that stands still.
Income taxes, corporation profit taxes, sales taxes, capital-gains
taxes, even estate taxes, all penalize motion. The value-added tax, to
which Europe is becoming addicted, uses an automatic to shoot at every
leap of the economic doe.
It can't be burned or stolen
Most assets lose value if the income from them falls. But land, like
gold, rare stamps, old firearms, or antique furniture, can climb in
value while producing no income at all. Buildings require upkeep and,
even if they get it, deteriorate in real value. Holding a piece of
machinery or a patented process off the market runs the very grave
risk that it will soon be made worthless by technological advance.
Land, however, doesn't deteriorate when stored. It can't be burned or
stolen. By giving land a huge tax break, public policy is saying, "Sell
stocks whose dividends are heavily taxed. Be wary of improving homes
and other buildings, lest your taxes rise. Be cautious in buying new
machines, for the more productive they are the more you will give up
in taxes. Instead, buy land. Hold land. As it was to our peasant
ancestors, land is in a class apart, our sacred cow." An observer
may wonder, paraphrasing Omar, what the landowner could buy one half
so tax-protected as the stuff he sells -- or doesn't sell.
There are few recent studies of the practical consequences of tax
policy on land values. By far the best was done by M. Mason Gaffney, a
leading land economist now with Resources for the Future. In a careful
survey covering every land sale in Milwaukee between 1965 and 1967, he
separated structure value from land value to show what a very light
tax burden land itself was bearing. Taxing land more and buildings
less, Gaffney concluded, "would so change the arithmetic of
property ownership that
no subsidies at all should be needed to make it profitable for
the owners of almost all the parking lots and decaying, obsolete or
inadequate buildings that now preempt nearly three-quarters of the
valuable land near the heart of Milwaukee
to erect new
buildings that would make better use of the site."
Nourished by other people's money
Administrators in many cities have begun to think of changing tax
policy as an alternative to urban-renewal subsidies. Philip
Finkelstein, Deputy City Administrator of New York, in a recent New
Times article called "It's Time to Mine the Tax Treasure
Underfoot," wrote: "In the agrarian societies where the
property tax was born, the tax on the land was in the best sense an
income tax." Such land produced crops, but urban land itself has
no comparable usufruct. ''It is not the soil that nurtures the
improvement in urban land, but money - other people's money. What
makes a piece of urban property valuable for construct ion is the sum
of public and private investment in and around that location.''
Finkelstein fears that unless assessments on urban land are increased,
there will be sharp rises in the taxes borne by the newer structures.
Such a shift would act as an ever stronger disincentive to renewal and
the improvement of the city.
In addition to shifting the emphasis in real-estate taxation from
buildings to land, there are some other actions that government should
take. As in any boom, land has attracted a number of operators who use
improper methods to try to exploit the public's belief that prices are
sure to keep on rising. Telephones are kept busy by land salesmen
selling lots for second homes, retirement homes, vacation homes.
Many buyers of such lots are holding the land for a price rise. James
W. Rouse, who assembled the land and conceived the brilliant design of
Columbia, Maryland, has pointed out that in 1971 only 95,000 vacation
homes were built on the 625,000 lots sold by vacation-land subdividers
that same year. "Exaggerated sales practices," says Rouse,"
are the reason for the huge imbalance. Imaginative planning and
development of the land is possible today. But not when land has been
divided into little pieces unlikely ever to be reassembled."
Rouse believes many local governments are too small and inexperienced
to copy with the subdividers - some of which are subsidiaries of very
large corporations. He proposes stricter regulation of this sort of
activity by state governments.
Nearly all governmental regulation of land use has a negative
character. Zoning laws, environmental-protection laws tell the
potential land user what he can't do. Necessary though such
regulations are, they do create an artificial scarcity that drives up
the price of unrestricted or less restricted land. That's why
governments at all levels should become more active on the supply side
of the land market. The preparation of land for intensive use requires
governmental as well as private initiative. Highway construction, for
example, has been a world unto itself, unrelated to public programs of
land use. Genuine developers ought to be able to sit down with
governmental authorities and work out joint plans for bringing more
land to a higher level of use by building roads, sewer systems, etc.,
for new towns and cities.
Worse than a stock-market crash
Nobody in his right mind would want to see a steep decline in U.S.
land prices. More than half of American families have a substantial
part of their assets in home equities. A sudden drop in these
boom-fattened values would shrink the national credit base and have a
more traumatic effect on the economy than a stock-market crash.
On the other hand, the land salesman's pitch that the price is bound
to keep on rising can't be true forever. At some point land prices are
going to get back in line with other prices. If public policy
undertakes to slow down the land boom, a crash may be avoided.
Meanwhile, if somebody tells you the U.S. is running out of land,
don't bet on it.