The Three Different Senses of Land Value

Harry Pollard

[Reprinted from a Land-Theory online discussion between Harry Pollard and John Havercroft, February and March 2006]

ED DODSON WROTE: "And, for the last seven or eight years in the U.S. at least, investors dissatisfied with returns in the stock and bond markets have been pumping their funds into real estate -- not worrying about negative cash flows so long as the potential resale values keep climbing."

Quite true and it emphasizes yet again the three land values we deal with.

'Economic Rent' is the value of the advantage provided to a location by the presence and access of people. This is easily appraised and is the amount a pure Georgist Rent collection would move to the Public Treasury. As it should as the values were created by the public.

However, land is by its nature a monopoly. As Will Rogers said: "They ain't making no more." Further locations can't be moved. In the ordinary market, a price rise draws in fresh production fast, lowering the price back to equilibrium.

When rents soar in a particular place, they can't be lowered by producing more land and moving it close by. So, the rents keep rising. These values are no longer Economic Rent but something else that has accompanied us through history. They are rack-rents.

A 'rack-rent' can be defined as the highest amount that can be extracted from a tenant without stopping production. (You have to leave the poor sods enough on which to survive.)

This is Ricardo's "Iron Law of Wages".

There is a third land value which is 'sales price'.

I can't get agreement on this among Georgists but a land sales price behaves just like a collectible market price -- as do the owners in each case.

A collectible owner is disinterested in income. He watches the price rise. If he owns a 16th century tiger maple desk, he doesn't put it to use -- rather he wraps it in plastic and stores it safely away as he watches the price increase.

In the same way, a landholder is less interested in income than soaring sales prices. If he gets an income by using a $100 million per acre space as a parking lot, or as a petrol station, it's a mild use designed perhaps to pay a property tax rise. He won't invest seriously in the lot. His essential focus is on the soaring sales price. (In the States, these temporary uses are called "taxpayers".)

In similar fashion slum owners are reluctant to spent money on their blighted buildings. Ultimately they want to sell the location for a huge price. They don't care about wet walls and broken doors.

The emergence of collectible sales prices is particularly noticeable with apartment buildings. Analysts have realized somewhat belatedly that apartment building prices have lost touch with the capitalized income that can be obtained from them. They shake their heads and wonder why its happening.

The rental income may be viewed as "rack-rent" -- if the landlord tries to raise them any further, people will move out. So there is a limit to what can be charged -- a high limit!

But there is no limit to the fantasies in the mind of the collectible owner as he views the ever rising sales prices of his collectible, whether it be an antique desk, or a piece of vacant or underused land.

From: John Havercroft [mailto:john.havercroft@dsl.pipex.com] Sent: Sunday, February 19, 2006 4:24 AM Subject: opportunity to respond to consultation on planning-gain supplement

John Havercroft responds to Harry Pollard, 19 February 2006]

I am not sure it is necessary to resort to seeing land as a collectible in order to explain its pricing and I am not sure you right that there are three elements to the valuation.

Starting from scratch, ownership of land is meaningless; what is generally understood by ownership is in fact a transferable right to either enjoy the income arising from the land in perpetuity, or to prevent others from doing so. The so called freehold, the ability to be free to do what you like with "your" land is hedged about with rules about zoning, planning, dangerous goods and activities, pollution etc etc; all of which are granted or taken away by others but which affect the level of income you have a right to enjoy from "your" land. In most societies "freehold" land can be confiscated for the greater good, although financial compensation is usually given.

Fundamentally I believe land value arises from two things:- where it is and what's been done to it, The first, location value, derives either from its natural attributes such as being on a harbour or from what man made artefacts surround it; be that a business district of a transport hub or just a good school. The second source of value is what has been done to the plot; from clearing and fencing for agriculture to building a skyscraper - the investment made ON the land. (I would exclude, as purist Georgists don't, the value of what is IN the land. I would tax resource depletion separately - but that's a whole different topic).

Looked at in this light the curious hybrid we think of as a "freehold building" can be thought of as two elements. Element one is a right to enjoy the income derived from a patch of the earth's surface, simply because it is there. The second is the right to enjoy the income deriving from what man has done to the patch of land. Income from the first most resembles an index-linked government secured bond; its income rises with national wealth and is secured as the first charge on the land. Investors will, rightly, accept a very low rate of cash return on this investment and, to the extent that they believe "their" plot is in a location where its value will rise faster than the national income they may be prepared to accept a zero or negative cash return. The second, the right to enjoy income from the man made artifacts ON the patch, is very different in kind. Buildings have a finite life and depreciate. Hedges require maintenance etc. Indeed what is on the land is, in its general sense, capital plant subject to all the vagaries of supply and demand on which owners or investors will expect the usual sort of returns from such an investment.

As an intellectual construct I think this works elegantly. If ownership could be separated in the real world there is an enormous potential demand for the sort of index linked long term investment that land represents; from pension funds and others with index linked liabilities in the long term. Over to Wall Street and Lombard Street -- perhaps.

From: LandCafe@yahoogroups.com on behalf of ericbritton [eric.britton@ecoplan.org] Sent: Thursday, March 09, 2006 9:23 AM To: LandCafe@yahoogroups.com Subject: [LandCafe] [The Land Café's Open Society Blog] Land Café comments on UK "planning gain supplement" consultation [http://groups.yahoo.com/group/LandCafe/messagesearch?query=plan+ning-gain&submit=Go&charset=ISO-8859-1]

Harry Pollard responds to John Havercroft, 9 March 2006]

First, we agree on resource depletion. Resources in the ground have an intrinsic value that is diminished by extraction. I wouldn't tax it. Rather, I would assert the common ownership of the people and put extraction out to bid. The amount that we would get could be very large.

My favorite example concerns the City of Long Beach in California. A consortium of oil companies acronymed THUMS (Texaco, Humble, Unocal, Mobil, and Shell) contracted to move oil out of Long Beach Harbor.

The companies pay 96.25% of the profit to the City and State as Rent. The City collects it each month, then forwards much of it to the state. (It actually holds on to these billions up until the last possible hour, so they can benefit from bank interest!)

Occidental has now taken over from the consortium. I don't know the terms of the new contract.

With regard to your other points - I use landholder rather than landowner in my courses and elsewhere - and landlord when it's a bit more emotional. The four restrictions on freehold in the States are Escheat, Police Power, Taxation, and Eminent Domain. As much of our law came from Britain, I assume these are your restrictions too.

As you know there are three incomes to the basic Factors of Production -- Land, Labor, and Capital. They are Rent, Wages, and Interest. Something I fear that George did not make clear is that Wages and Interest are under the control of the market price mechanism -- Rent is not.

Simply, when demand increases, so does the price. The market price mechanism stimulates production and draws in fresh supplies from elsewhere. These satisfy demand and the price returns to equilibrium.

The price mechanism doesn't fix the equilibrium. It simply hunts around it. What fixes the equilibrium is of enormous importance but seems to be ignored by modern neo-Classicals. If the equilibrium changes, they prefer to readjust their graphs to show that the price mechanism is making the change.

It doesn't. It simply acts like a thermostat, maintaining the equilibrium.

As it does with Capital, supplying and withdrawing according to the Interest Rate.

And as it does with Labor, moving people around to places where they are needed.

However, the price mechanism cannot encourage greater production of land. We already have all we are going to have. Nor can it move land around to where it is wanted. When demand for land increases, the price goes up, but there is no mechanism to bring it down. So, it keeps rising.

This is where the "collectible mentality" cuts in. People hold on to a collectible because the price is going up. The act of holding from the market raises prices still further -- which encourages holding.

As you know, to engineers this is positive feedback - as opposed to the price mechanism, which is negative feedback.

Holding land from use for an expected increase is on all fours with other collectible holding. The important distinction is a certain lack of interest in income as opposed to sales price. We saw the same situation occur with regard to stocks in the run-up a few years ago.

Analysts moaned about price/earnings ratios even as people were holding their soaring bits of paper with no thought of incomes. They were collecting.

I see little difference between holding land as a collectible and holding an antique tiger maple desk as a collectible -- or a work of art, an ancient book, or a beer can.

Obviously you will act somewhat differently with each kind of collectible you hold -- but this is a difference of degree rather than kind.

However, if you don't like the 'collectible' analogy -- so long as you see differences between these and price mechanism controlled items all is fine.

Incidentally, I've not come across an economics book analyzing collectibles -- though there a multiplicity of "How To" volumes. The neo-Classicals seem to regard the collectible market as part of the market process, although the motives and economic pressures are completely different from the ordinary supermarket.

I suggest Rent arises from one cause. It is a value that arises from the presence and access of a community. This value attaches to locations. Remove the community the Rent disappears. Bring them back and some locations hold more Rent than others.

If we all have a common right to the earth, the collection of Rent for the community establishes that right.

It is ethical to collect it, for the community is merely recapturing the values it created.

The economic effects of this are many. It would remove land speculation -- the collecting of land and holding it out of use. Land would become part of the price mechanism controlled market and the enormous amount of unused and underused land would become available.

I pointed out that the "equilibrium" is decided by the alternative. When Labor has no alternative available, wages head downward until they reach subsistence levels. This is the "rush to the bottom" often mentioned in anti-Globalization circles. Yet, this "rush" has been with us always -- and certainly before Globalization.

If, pressured by the Rent collection, much land (in every country most of it) is released by people unwilling to pay Rent for land they won't use, Labor would have its alternative. Experience seems to show that when even a small percentage of Labor heads out to free land, the resulting shortage of workers raises wages.

This is Ricardo, or course, but he missed something.

He showed how wages dropped as better land was filled until on the poorest land Labor would barely survive. (Needless to say, Rent would go up as wages went down.)

His contention was actually Malthusian, for with increasing population, the land would be filled up and when its all gone, people would begin to die. However, in reality, the land is not so much used up as taken up. Large amounts are fenced but unused -- or used fitfully.

(Unless 'deep pockets' -- the government -- provides monstrous amounts of the people's wealth to fortunate landholders like the Duke of Westminster to persuade them to use it.)

This occupation without use forces wages down to the margin long before there is any need - and creates the illusion of overpopulation. You'll recall that Kevin Cahill pointed out that less than 8% of the UK is "developed".

The US is practically empty - but every chunk is owned and is mostly unused or underused.

You appear to approve the proposition with regard to land that:

'Investors will, rightly, accept a very low rate of cash return on this investment and, to the extent that they believe "their" plot is in a location where its value will rise faster than the national income they may be prepared to accept a zero or negative cash return.'

Yet, as I've described, this not only betrays a certain resemblance to the collectible economy, this is actually the problem -- a problem that will be strongly attacked by the full collection of Rent.

Or, if you wish, the collection of a full land value tax.