The Impact of Property Taxation
on Housing Markets
Would the Adoption of Land Value Taxation Drive Down the Price of
Land and Increase Housing Affordability?
Edward J. Dodson
[A paper delivered at the Annual Conference of the
Council of Georgist Organizations, held in Philadelphia, Pennsylvania,
3-7 August, 2005]
This paper examines how the gradual implementation of land value
taxation (i.e., exempting property improvements from the tax base,
while progressively capturing location rental values) is likely to
affect the market for housing over time.
An important theoretical assertion suggested by Henry George's
writings on the subject, is whether, as communities approach the full
collection of location rental values, the selling price of land will
fall toward zero. George predicts this outcome will result because
location rental values are no longer privatized and, therefore, cannot
be capitalized into selling price. He asserts in Progress and
Poverty that,
"
by compelling those who hold land on
speculation to sell or let for what they can get, a tax on land
values tends to increase the competition between owners, and thus to
reduce the price of land."[1]
The cautious supporter of George's analysis can point to his actual
wording and his inference of tendency. More generally, George
develops the laws of production and distribution of wealth as laws of
tendency. He is well aware of the many variables, or externalities, at
play in any market.
Even more relevant for the future is the expected change in how
people behave in response to the financial incentives resulting from
liberating from taxation labor and investment in capital goods while
removing the financial rewards of hoarding land for speculation. Once
the process begins, the dominoes will begin to fall at an accelerated
pace in the right direction:
"For this simple device of placing all taxes on the
value of land would be in effect putting up the land at auction to
whosoever would pay the highest rent to the state. The demand for
land fixes its value, and hence, if taxes were placed so as very
nearly to consume that value, the man who wished to hold land
without using it would have to pay very nearly what it would be
worth to any one who wanted to use it."[2]
EXTERNALITIES ABOUND
Today, the externalities affecting land markets are even more
numerous than in George's time. In every regional market there are
both natural and societally-imposed limits on the quantity of land
available for development. Our experience with sprawling development
surrounding large cities and even relatively small towns shows that
these limits are not fixed in any absolute sense. Land that was once
outside the ring of reasonable commuting distance is made accessible
by limited access highways or high speed rail systems. At the same
time, land is also set aside for these and other public purposes. As
we move away from the high density development patterns of our older
cities and towns, we press our public officials to keep huge tracts of
land open for recreation or (more recently) as wildlife habitat
preserves. Zoning and other planning tools can result in either more
sprawl (e.g., because of large lot zoning) or in walking communities
(e.g., because of provisions for mixed-use development or
transit-oriented development).
Height restrictions for buildings also play an important role in the
efficient use of land, with the added complexity that even in the
central cities higher buildings tend to create more automobile use and
land allocated for automobile parking. Parking lots absorb over 10
percent of the land in U.S. cities, but a much higher percentage in
our central business districts. As much as 80 to 90 percent of the
total is developed as surface parking lots. The amount of land used
for automobile parking around the typical suburban shopping center or
mall is several times greater than the actual land area developed with
stores. A regional mall will include as much as sixty acres of land
paved over for automobile parking.[3]
These are important characteristics of every regional market,
operating in conjunction with other key factors - all of which are
then influenced by state, national and global economic dynamics. If we
were to attempt to construct a regional market model for purposes of
forecasting land prices, we would need to know a good deal more
information, including:
- Population movement, most importantly whether in-migration
exceeds out-migration, and whether those entering have greater or
lesser household incomes than those departing.
- Population demographics showing to what extent the population
is aging and how many households are forecasted to have children
attending area schools.
- Land ownership statistics, to identify who owns the most
developable but undeveloped land and whether they reside in the
community or are absentee owners.
- Scheduled or contemplated infrastructure projects that will
take land out of the market and increase (or decrease) the value
of contiguous land parcels.
- The effective age and condition of existing housing units, as
well as the number vacant due to condition, abandonment or other
reasons. § The number of new housing units and type
constructed annually.
This is only a partial list of the information we need to compile and
analyze. And, even with all of this detail put into a computer model,
other factors may prove to be more powerful than local or regional
dynamics.
WHERE WE ARE TODAY
Last year, the Federal Reserve funded a study[4] on residential land
prices across the United States. The findings will not be surprising
to most attendees of this conference:
- since 1970, residential land prices have grown faster but
- have also been twice as volatile as existing home prices;
- averaged from 1970 to 2003, the nominal stock of residential
land under 1-4 unit structures accounts for 38% of the market
value of the housing stock and is equal to 50% of nominal annual
GDP;
- the real stock of residential land under 1-4 unit structures
has increased an average of 0.6% per year since 1970; and
- residential investment leads the price of residential land by
three quarters.
- We also estimate that in 2003:Q3 the nominal value of the
entire stock of residential land is the same as annual GDP.
Even without the statistics, we know that land - and, therefore,
housing - prices have been climbing year after year for more than a
decade. Actually, land prices have been climbing with periodic "adjustments"
almost from the day the colonists set foot on land at Jamestown. For
the first century and a half, what made the experience of life in
colonial North America so remarkable was the widespread access to
enough land at little or no cost. Some poverty existed, but the
opportunity existed for most families to be largely self-sufficient.
Today, there are comparatively few families making their living as
farm owners. Yet, for the bottom two-thirds of households in the
United States net worth in a home and the land underneath represents
most of their personal wealth.
As indicated above, land value is fast approaching 40 percent of the
total value of residential property. Despite the fact that the land
market bubble seems close to bursting in the most speculation-driven
markets, the national median price of housing continues to increase,
to over $207,000 in May of 2005.
There are no statistics on the amount of vacant but developable land
parcels in residential communities. Estimates run up to 15-30 percent
of total land area in many cities and towns. To get a rough idea of
the current total residential land value in the United States, we can
use the above-quoted median housing price and the 40 percent land
value figure, as follows:
- Median residential land value = $82,800 ($207,000 x 40%)
- Total residential land value = $10 trillion (120,834,000
housing units x $82,800)
Remember, this figure is based on median residential land value.
Using average housing/land prices would likely produce a much higher
figure. Moreover none of the vacant but developable residential land
is included.
THE FUTURE UNDER A LAND VALUE TAXATION REGIME
The economic stress associated with spiraling land prices is clear to
many here but not so clear to others. Numerous analysts continue to
forecast that housing prices will plateau and, perhaps, fall somewhat
in response to rising interest rates. Even those who are forecasting
the bursting of "the housing bubble" do not make the
connections we make based on the lessons learned from Henry George.
With George's methodology to guide him, Fred Harrison forecasts 2010
as the next major burst in the land market cycle. For reasons beyond
the scope of this paper, I am inclined to expect the crash to come
before then. After this crash, we will have the next decade or so to
achieve significant progress toward a land value taxation regime and,
thereby, avoid yet one more recession or depression.
Whether and how far land prices will fall in response to higher and
higher taxation of location rental values is more difficult to
predict. As a community imposes higher costs on land owners for
holding land out of use, we can expect that some owners will put their
land on the market or initiate development plans sooner than they
otherwise might have. The lower costs imposed on property improvements
will work in conjunction with the higher carrying cost on land to
stimulate development to bring land to its "highest and best use"
as determined by local market conditions. The tendency of land prices
to come down - due to the increased competition between land owners
for purchasers - may be offset by increased demand. The key variable
will be how quickly investors begin to recognize the opportunity to
profitably develop locations in the community and the competition to
purchase the most advantageously positioned locations. Another
variable is the ability and willingness of owners of land parcels to
absorb higher annual taxes without feeling any pressure to act.
Wealthy individuals or entities may not bring their land to
development even at the point where they are paying the full location
rental value in taxes. This could keep the supply of land offered
below that sought by investors for development.
CONCLUSION
As proponents of land value taxation, we need to stress when
attempting to convince elected officials and others of the merits of
our case that every regional market is affected by distinct qualities.
Thus, while its is theoretically possible for the selling price of
land to fall and fall to a very low level, this is not likely to occur
in the short run. More likely, land prices will stabilize as supply
more closely matches demand. This means that government expenditure
and private philanthropy will continue to be needed to increase the
supply of decent, affordable housing to people whose household incomes
continue to fall in real terms.
The extent to which communities have already moved toward land value
taxation has been too limited to stimulate the type of expansion in
economic activity Georgists predict will occur when the taxation of
location rental values replaces most or all other local taxes. What
can be said is this: cities such as Harrisburg, Pennsylvania are no
longer hindered by the disjointed incrementalism that continues to
plague most other communities. Harrisburg now at least has a strong
enough revenue base to begin to channel funds into its more distressed
neighborhoods, where housing needs are great and housing costs surpass
the financial capacity of many residents. Advocates of affordable
housing everywhere would do well to press for the adoption of land
value taxation to replace taxes on property improvements, wages and
commerce. There is no other change in public policy with the potential
to stabilize and eventually lower the cost of housing.
NOTES AND REFERENCES
[1] Henry George. Progress and
Poverty (New York: Robert Schalkenbach Foundation edition, 1975.
Originally published 1879)., p.416.
[2] Ibid., p.437.
[3] See: Kathleen L. Wolf. "Trees, Parking and Green Law: Legal
Tools for Sustainability," Human Dimensions of the Urban
Forest, Fact Sheet No.15 (University of Washington, College of
Forest Resources, March 2004).
www.cfr.washington.edu/research.envmind/Roadside/Parking_Trees_FS15.pdf
[4] Morris A. Davis and Jonathan Heathcote. "The Price and
Quantity of Residential Land in the United States," Finance
and Economics Discussion Series 2004-37, Board of Governors of the
Federal Reserve System, July, 2004
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