Housing Policy

This is an extension to previous posts:

• http://politicallyuntenable.blogspot.com/2012/09/objective-of-housing-policy.html
• http://politicallyuntenable.blogspot.com/2012/09/landless-housing.html

Taxes in place of property Tax

A property tax is a tax levied based on the value of the land and structures built on top. But if land is no longer traded, then property tax is levied only against the value of the structures built. However, this is hardly the only way to levy tax for real estate owned.

Land Value Tax

In short, a land value tax is based on an estimation of the market value of land based on its potential in residential or non-residential use (whichever is better). This tax ignores any current existing structures on the land, so if it is used "inefficiently", then the land value tax penalises this inefficient use. The idea is that a property tax penalises capital investment (and housing is now in the same category as capital investment).

The idea is to promote market efficiency and eliminate the deadweight caused by property taxes. Because the LVT is charged regardless of development, leaving land undeveloped is highly undesirable as you pay taxes on land that provides no revenue.

The ultimate objective of LVT is lower house prices, more development and higher population density. All of these fit the objectives of housing policy outlined in the previous post.

As an example, Pennsylvania uses this concept to levy a land tax that is much heavier than property tax. While statistical evidence goes to show all of the objectives achieved, there was great difficulty in maintaining proper land assessment across the nine decades it was in use. Some local government would maintain proper assessment that were timely and accurate, others would not. The question is likely what the cost of maintaining proper assessment versus the cost of sub-optimal property tax effects.

Examples in Australia and New Zealand are more compelling, with their use since the 19th century, they've mostly achieved the same objectives.

Statistical evidence in all cases suggests a light to heavy increase in urban development due to LVT.

However, it seems that LVT in practice must also be combined with competent zoning laws and good timely (likely yearly is good enough) property assessment. A variation for no land exchange is that a rent is charged for using land, much like a LVT, either for living purposes or commercial/industrial purposes. Like Australia, there can be a threshold above which tax is levied. The LVT could fully replace property tax.

Government management of land in history

Individual ownership of land in western democracies is a concept developed slowly over the last few centuries with the move toward land titles. This is likely due to the growth of the middle class over the same timeframe and the dissolution of old agrarian economies. Agricultural use of land tended toward community based ownership with informal contract over use between parties (each party could use the land in different ways or at different times). Modern use of land tends toward individual/single family ownership.

It's important to ask the simple question of whether this is desirable and evidence speaks to it generally being a "yes". A more nuanced explanation relates land ownership with modern industrial use of land. Since land is not as directly used for revenue (agricultural output) than in the past, more importance is placed on the structures built on top. Whether it is a software company that owns an office building (and thus, most of its revenue depends on the human capital owned, not the structural capital) or a car company with a robotic factory, the land itself doesn't matter as much except for how hard it is to build a structure there and whether they can hire the necessary labour force from the surrounding area.

So, if the issue now is no longer agricultural output, then land management should likewise change. Governments have largely shifted toward free market mechanisms to lower the administrative cost of assigning land but this has resulted in inner city dilapidation, land speculation (and the associated real estate bubble problems, a phenomena that should be well feared in today's heavily damaged economy from the sub-prime mortgage debacle) and uneven distribution of government services (such as education or road systems).

It's difficult to avoid the "tech park" issue because of the economy of scale that develops from the concept. That is, like businesses which depend mostly on human capital (which is most modern industries such as tech and finance) build in the same area. Then, the talent pool that they depend upon slowly moves into the area which reduces personnel and other operating costs. However, this means that local property prices start to shift dramatically according to the success of any particular industry.

Steel does well? Then the cities with steel mills get a significant spike in property values, the associated increase in tax revenue, increased development which is, as we've seen today, followed by the drop in steel manufacturing revenue and the rapid dilapidation of the neighbourhoods involved in the economy.

But what we see is that the specific location matters little for almost all of these industries, or that there are many locations in which they can exist but they can only choose a few. For instance, steel industry would like to be near water to cool their machinery but there are many bodies of water to choose from, however, they chose to be mostly around the Great Lakes. Another example would be the financial industry. They would like to be near a lot of people and money, so it has developed in locations key locations in each country such as "Wall St" in the United States and "Bay St" in Canada.

With this in mind, what land taxes and property prices should reflect is this reality in which locations matter little but what is on the land matters more.

Price does not reflect land value

If price reflects only the structure built and not the location, it more closely resembles the decision process of most modern industries. Whether you build your investment banking firm in Dallas or in Chicago, what matters are the people working in the building, not the land underneath it. Your investment bankers aren't growing corn after all.

Assessment problems are not likely to be difficult. The real estate industry already separates land price and house price in its analysis of pricing across any piece of property. It would be a bit strange but the change would have individuals pay for property prices but be taxed against land price.

Tax is property agnostic

If taxes on property were levied based only on the land and not the structures on top, then it encourages individuals to build the structure which generates the most revenue on the land. If that is a steel mill then a steel mill would be constructed. If it is a financial firm, then a financial firm is built. A property-agnostic tax would help to prevent discouraging high cost capital investment (like large expensive multi-billion dollar factories).

As a note, although not explored here, it could be worth investigating if property taxes discourages the construction of high cost capital facilities leading to out-sourcing issues in America. For instance, the construction of a ten billion dollar robotics plant to create smart phones also incurs a property tax on ten billion dollars of property value. That would be a major disincentive to construct such a facility in the United States.

As land value tax has been used in practice successfully in nearly two dozen countries for well over a century, it would seem to be a workable concept in areas not using land value tax.

Zoning law effects on property prices

In general, according to the previously stated objectives of housing policy, zoning would be used to increase housing supply to keep rent and property prices stable over the long term. Of course, zoning law is an intricate relationship between a competent bureaucracy and the land needs of the population. Therefore it's a question of good government.

A look at Hong Kong, we have an example of Comprehensive Development Area zoning. In heavily CDA zones, environmental complaints is somewhere between 4x to 6x less frequent, per capita, than areas with no CDA. There was also lessened price variance. Although one of the goals of CDA was to increase property prices compared to non-CDA areas (to reflect the superior urban planning). That is likely to be a complex subject as it likely a result of unfavourable development not occurring close to homeowners that help keeps prices higher than non-CDA zones.

There are some analysis that suggests the United States developed a bottom-up approach, with many different local governments managing various districts, that attempted to hedge the unsustainable cost of urban sprawl through zoning versus consolidation with dense central cities. This creates the implication that American experience with zoning laws was that to promote very high prices and low population density. Then the answer, for American homeowners, is to buy newer and newer development to keep the cost of home ownership low. But, this creates other problematic costs such as environmental pollution due to increased car use and commuting, increased stress and mental issues due to traffic congestion, decreased economy of scale in the use of water/electricity/snow removal and other local services. So, on the converse, zoning law can substantially increase property prices, lower population density and create many problems.

In particular if we look at California, many suburb communities adopted zoning policy in the 1970s to simply prevent new development. The result appears to be very old housing (using the lead paint and asbestos as an indication of age) and exceptionally high property prices despite lower population growth than the rest of America (which experienced lower house price growth). This would be an example of zoning policy working against the stated objective of providing a greater supply of housing and keeping prices affordable (as a percentage of median household income).

Between these two examples there is one very large difference: population density. It can be easily seen that Hong Kong suffers more greatly due to land scarcity than the United States which can expand along the edges of every single city to accommodate more inhabitants. This makes a significant difference in the "need" for zoning laws. Specifically, Americans can constantly choose new development rather than pre-existing housing to alleviate high demand in certain areas. However, this urban sprawl has additional environmental and infrastructure costs. People who live further from central job hubs need to commute to work and add to infrastructure woes whose costs may not be covered by any taxes/fees levied against these new commuters. Further, it also likely that these individuals are purchasing more affordable accommodation outside of a city due to lower income/wealth and thus taxing them more heavily will disproportionately affect the poor (though to what extent is debatable).

For the United States, there may be yet another two centuries of cheap land, thereby delaying the need for any government interference in anywhere but a few key urban centres. This is the same with Canada. So, stopping the trade and sale of land is not likely to make a large difference in prices except in major cities. This fall in prices should be then met with a construction drive. In particular, the United States regularly uses zoning law to restrict areas for higher income individuals, but if this works, then one expects the converse to work. Zoning laws push up housing density to prevent urban sprawl (and the associated environmental and infrastructure costs) and lower housing prices.

Urban Planning, Price Control and Segregation

In the absence of government, the level of segregation (based on statistical data) is likely to become primarily based on class and wealth strata than it does with ethnicity or skin colour. That is, a white community would be willing to accept blacks in their neighbourhood, provided the blacks were of sufficient wealthiness (and past wealthiness in the case of new money vs old money). But, in fact, wealthier individuals have a greater capacity to influence local government in order to obtain government interference to increase the level of wealth segregation in communities.

Likely somewhat ironic, given the tone of the discussion, but less government interference with regards to setting zoning laws in America would actually depress prices in many parts of the country. The primary reason for high prices in California is due to the "high price" restriction in areas such as Cupertino or Palo Alto, a tactic both for the wealthy to be near wealthy and for certain ethnicities to be excluded from the neighbourhood.

But, more accurately, it is the type of government interference that matters. Generally, if it does not match the objectives of housing policy (maximise house ownership, decrease price variance and increase density of land use for environmental reasons) then it should be rejected legislation. Competent bureaucracies can exist but most of these communities would find this type of government policy to be highly politically untenable.

Some aspects that may cause urban sprawl is the requirement for American universities to only select a maximum number of students per school. The expected result, for the rich to obtain more university slots, is urban sprawl to have more schools and thus more slots. This is only a cursory analysis of that policy and so may be inaccurate.

Australia and Canada both consider 30% of income to be the maximum threshold for affordable housing. This considers all costs, CMHC (Canada's housing federal housing agency) is in fact quite strict, as the cost includes mortgage, utilities and insurance (that is, it considers all expenses associated with owning a home, not simply the mortgage). Also, ideally, a family should earn above the statistically defined (by Statistics Canada) low-income cut-off (LICO). The LICO is not a poverty measure and Statistics Canada unfortunately has not been tasked with any particular paradigm for measuring poverty specifically.

Data for 2010, from the Bureau of Labor Statistics (USA), mean before-tax income is $62,481 and $16,557 spent on housing, and total expenditure of $48,109. If we calculate as a percentage of total expenditure (a good measure for after-tax income, tax makes up most of that mysterious hole between income and expenditure), then that is 34.4% of the household budget. This is, on average, above what Canada or Australia would recommend and is a sign of "high" or "unaffordable" housing.

Data for 2010, from Statistics Canada states that average expenditure is $70,574 and of that $20,693 relates to housing ($14,997 shelter, $3773 household operation, $1923 furnishings and equipment). This is at 29.3%, just under the government imposed concept of no more than 30% of income. Actually, that is quite an amazing result; a government program to meeting its objective (go CMHC?).

Data for 2010, from Australian government, indicates that 27% of expenditure is housing, also meeting their objective. From Statistics Sweden, the SCB, housing costs hovers between 27.4% to 31.7% depending on whether you live in sparsely populated areas (cheapest) or metropolitan municipalities (most expensive). Compared with the rest of Europe, Swedish housing expenses are near the highest but they also enjoy the highest quality of housing, so it is likely in line with the rest of Europe.

Australia, Canada and Sweden engaged heavily in assisted housing programs, moreso than the United States, although all countries do so in some aspect. The decreased share of income used for housing in the non-American countries is most likely due to the increased federal expenses involved in housing projects. The United States only a few percentage points higher than the other countries but there is also indication that American incomes are also substantially lower for the middle class compared to Canada, Australia and Sweden (between $20 000 to $30 000 USD lower). Some of that lower income can be mitigated by the fact that many Americans tend to live in sparsely populated areas with much lower cost of living but as the calculation of housing expenditure is in terms of percentage, Americans have lower disposable income both by an absolute measure and a relative measure.

Several major differences arise in the policies between Sweden/Canada and the United States. Housing projects in the United States suffered greatly from the "not in my backyard" political problem, whereas the Swedish and Canadian governments were more forceful about "mixing" neighbourhoods. As a result, housing projects in the United States, much like the housing projects of France, rapidly fell into economic ruin and dilapidation as concentrated poverty caused an economic downward spiral. On the other hand, Canadian and Swedish efforts were highly successful both at increasing home ownership rates but also by placing impoverished individuals into middle class neighbourhoods had increased class mobility. All measures of class mobility for Canada and Sweden are far superior to that of the United States.