A housing whodunit

Earlier this week, I posted an article, The Texas housing miracle, which once again argued that housing markets with responsive land/housing supply are both more affordable and less prone to bubbles/busts than markets where land supply is constrained by physical and/or regulatory barriers.

The article, whilst acknowledging other US states with similarly relaxed land-use regimes, singled-out Texas as possibly the best example of the benefits achieved from a highly responsive land/housing supply system, since its home prices have managed to remain both affordable and stable in the face of very high population growth (Dallas and Houston each added a whopping 1.2 million people each over the past decade!).

An alternative view put forward by fellow blogger, Cameron Murray and others, is that Texas’ stable and seemingly affordable housing has instead been achieved because of it’s high property taxes. According to Cameron:

…why do prices in Houston still appear so dramatically affordable?

One major reason is the relatively high property tax rate…

One would expect areas with higher property taxes to have structurally lower prices, reduced price volatility, and much lower price to income ratios…

at lower interest rates a fixed percentage property tax leads to greater price differences. Therefore, over time, we would expect Houston home prices to be a smaller fraction of comparable homes elsewhere as the property tax differential has a greater price impact at lower interest rates…

Of course, this does not mean that housing is lower cost. It just means that cost of housing is borne by annual tax obligations rather than capitalised in the price…

Perhaps once the property tax differential and other demand side factors are properly considered we will see Houston’s supply-side impact on housing prices diminish to zero…

Evidence of supply-side effects on home prices remains elusive.

The above quote is a short extract only. You can read Cameron’s full article here.

So let’s take a look at the data to see if Cameron’s claim that Texas’ stable and seemingly affordable housing has been caused by its “high property tax rate”.

Below is an interactive graphic showing median property taxes by state as a percentage of home prices and income. The graphic was last updated in July 2011 (Click here to use interactive graphic).

Using data from this graphic, I have extracted three types of property tax data:
  1. Median property taxes as a percentage of home value;
  2. Median property taxes as a percentage of income; and
  3. Median property taxes paid per home.
First, consider property taxes applicable to states where land/housing supply is restricted through regulation, and home prices have been both unaffordable and highly volatile:
New Jersey is the clear stand-out amongst the supply-restricted states, with New York coming in second.
Now consider the states where land/housing supply is not significantly restricted through regulation, and home prices have been relatively affordable and stable:

Okay, so Texas is the stand-out amongst the supply-responsive states.

Now let’s combine the supply-restricted and supply-responsive states together to determine whether there is a strong correlation between the level of property taxes and home price stability and affordability. Texas is shown in red, the supply-restricted states in blue, and the supply-responsive states in green.

First, consider median property taxes as a percentage of home values:

 

Now median property taxes as a percentage of incomes:

And median property taxes paid per home:

As you can see, Texas clearly does not have the highest property taxes – that honour goes to New Jersey. Moreover, Georgia, North Carolina and South Carolina – all supply-responsive states with relatively stable and low cost housing – have relatively low levels of property taxation.

To put these findings into perspective, and to debunk Cameron’s claim that the level of property tax is a key determinant of whether home prices remain stable and low, I have charted New Jersey’s home prices and Median Multiple against the supply-responsive states.

First, real house prices:

As you can see, New Jersey’s home prices have been far more volatile despite it having the highest property taxes.

Second, consider the Harvard/Demographia Median Multiples (note: the New Jersey / New York metropolitan area is joined):

 

Once again, despite having high property taxes, New York / New Jersey metro has experienced lower levels of affordability and much higher volatility than the supply-responsive states.

While there are very strong reasons supporting the implementation of a broad-based land or property tax in place of less efficient forms of taxation, it is difficult to argue that such taxes have played a major role in promoting price stability and maintaining low property values in the US.

If property taxes were a major factor, New Jersey’s home prices would be low (relative to incomes) and it would have experienced minimal price volatility. In a similar vein, Georgia, North Carolina and South Carolina – all low taxing states – would have experienced relatively higher home prices (when measured against incomes) and high levels of price volatility.

Perhaps Cameron’s last sentence should instead have read: “Evidence of supply-side effects on home prices remains elusive conclusive”.

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Comments

  1. High property taxes for foreign investment didn’t save Florida. I agree here that the property tax argument is weak.

    Occam’s Razors are planning regimes and credit availability.

  2. UE

    I agree with “Evidence of supply-side effects on home prices remains conclusive”.

    I also agree that whilst a housing market cannot have unreasonably unaffordable housing without easy expanding credit, the reciprocal is not true if you organised responsive supply of land for housing. However, the above analysis turns up some important evidence, although not conclusive.

    I have previously argued that direct taxation (in Australia its state and local)on land or land transactions actually leads to higher prices when those doing the taxing have the ability to restrict the land supply. So in restrictive land supply regimes with credit expansion occurring,the cost of taxation is turned into an asset or value of the asset, thereby fueling the level of house price unaffordability.

    That is how the Politico-housing complex enriches themselves whilst keeping for a time at least the heavily indebted house owners happy

      • Leith,

        Plenty of data there, but you missed a few points.

        1. Houston property taxes in total, according to a recent commentor was 2.88% of the market value of ther property. Far higher than any of the figures here.

        2. The tax rate in Houston in particular has been climbing since THEIR LAST BUBBLE. This keeps prices stable.

        3. Prices are simply capitalised rents, yet rents in Houston are simliar compared to incomes as Australian cities.

        4. The question then is why are rents in Houston being capitalised at such high rates?

        5. All the ‘responsive states’ have had serious bubbles and prices are down substantially.

        6. The State by State comparison doesn’t tell us much, since Texas and New Jersey both seem to have boom and busts (and all the other states you mention)
        http://research.stlouisfed.org/fred2/data/TXSTHPI_Max_630_378.png
        http://research.stlouisfed.org/fred2/data/NJSTHPI_Max_630_378.png
        http://research.stlouisfed.org/fred2/data/GASTHPI_Max_630_378.png
        http://research.stlouisfed.org/fred2/data/PASTHPI_Max_630_378.png

        The whole point here is that prices are simply capitalised rents. The quantity of new housing suplpy is determined not by the planning scheme (which controls the location and type of housing), but the number of sales of new property a developer can achieve in a given period.

        Also, you haven’t explained how price competition is going to work in land markets with ‘responsive’ supply, since if developers discount prices below market, someone else can buy it and sell low and sell at the market price.

        Land is the ultimate second hand good market.

        @Steven, the Georgist would say that a 3% property tax (on total property value, not land value) would have a massive impact on prices. For example, the previous commenter who bought a home in Houston with a market value of $123,000 paid $4700 per year in land tax, while the land component was a mere $10,000 of the total market value.

        • Clutching at straws a bit there Cameron. I love the way that you focus on Houston yet ignore the other Texan markets (e.g. Dallas) that never bubbled and have maintained affordability.

          Face facts mate, there is a far higher correlation between price stability/affordability and resposnive supply than there is with credit availability.

          • Do you know the property tax rates in Dallas? http://www.dallascad.org/forms/11estrat.pdf

            About 4% in total. Given the mortgage rates of 6%, you’d be paying the equivalent of 60% of your mortgage in property taxes.

            I certainly believe supply and demand influences the market price of a good. I would certainly believe that in Australia, HAD HOUSING SUPPLY BEEN RESTRICTED, it would show up in rents, and therefore the relationship between rents and prices would be the same over time, but rents would rise as a proportion of incomes.

            But as you note, rents are going nowhere at the moment and the very concern about housing is that prices are outpacing rents.

            Also, since when did supply influence the price of an asset? Shares for instance. Aren’t asset values simply capitalised returns?

            Also, I have not seen ONE SINGLE town planning document referred to in this debate, nor have I seen reference to the quantity of approvals given by councils in any period of time (nor the stock of land zoned for residential development in any area).

            Is it surprising that the only developers to comment here actually suggest that has always been plenty of supply?

            If you truly believe that zoning of any sort is restrictive and causes price impacts, you would have to believe that the existence of a river, mountain, the ocean etc, which is a natural ‘no residential’ zone increases prices.

            At the heart of this debate are two misunderstandings

            1. prices are capitalised rents, and
            2. land values are derived from the rents of the highest and best use, not by some alternative marginal use.

            These ideas are why no one besides the development lobby has spoken about price impacts from town planning until CJ’s 2003 housing affordability report, in which his main recommendation was to increase access to finance for home buyers.

            Convinced?

    • Spot on DT.

      As with everything, potential conflicts of interest need to be removed in order to have a well-functioning system. Having the same institution taxing and controlling land use regulations will lead to behaviour that increases the taxes collected, which means regulations that increase prices.

      • I too agree that Deep T has it right.

        I too have said this before. Taxes will not avert a price bubble if supply is restricted, they will merely provide government with a revenue increase.

        Deep T is also right, that easy credit will NOT cause a price bubble if “supply” is free and open enough.

        I also believe that price volatility will occur when supply is restricted, and that the amount that credit would have to be “tightened” to avoid a bubble under these conditions, would make it almost impossible for anything at all to happen in the economy. I simply do not believe that there is any credible “tight credit” policies that will match “ease of supply” for stabilising urban land prices and causing numerous flow-on economic benefits. Because low, stable urban land prices do indeed have massive economic and socio economic benefits and we are idiots to throw these away.

        On the earlier thread, I had people arguing that Texas had “restrictions on credit” that were more important than their freedom of supply. But when I said that South Korea had tough credit restrictions, and tough land supply restrictions, and serious price volatility and bubble issues, the argument was reversed, to claim that South Korea’s credit restrictions were not really that tough. Hey, they are a lot tougher than Texas’s.

        We can’t have this both ways.

  3. A Georgist view would be that these levels of property tax are so low they wouldn’t have a big role to play.

  4. I think no one will argue against what you are saying Leith. After all, it is the basic economic concept of supply and demand.

    What would be more interesting is to start thinking about how this would fit the Australian context. What would be a working solution considering issues that will arise if housing supply would be deregulated?

    Two issues, although there are likely to be many, many more:

    – Government depends on housing for a large part of its funding (whether we like it or not) and it’s likely that revenue would drop upon deregulation. Should government raise taxes or decrease services to offset this drop in revenue? Who do we tax or which services do we slash?

    – Sprawl is already causing issues such as putting a strain on infrastructure budgets and private lives (increased commuting times). How to provide more flexible land use without exacerbating these issues? (notice there’s a conflict where more flexible supply will mean a drop in government revenue whilst increasing the need for revenue to invest in infrastructure…)

    The challenge here is to move away from the rigid regulation and to wean government off of its housing addiction, while taking into account the issues that exist and the many, many different opinions people have about what should be and what can be.

    That’s governing in a nutshell. It can always be done better, but it is never easy regardless of what some/most people may think. Time to start appreciating that so there can finally be a constructive debate in society that doesn’t just end in ‘government done it’.

    * Don’t get me wrong, I agree with you Leith. Just trying to get a debate going on possible solutions.

    • “I think no one will argue against what you are saying Leith. After all, it is the basic economic concept of supply and demand.”

      Try telling that to Cameron who still believes that constraints on land/housing supply have NO IMPACT ON PRICES!

        • Anon NL, you raise some important questions.

          “…….Government depends on housing for a large part of its funding (whether we like it or not) and it’s likely that revenue would drop upon deregulation. Should government raise taxes or decrease services to offset this drop in revenue? Who do we tax or which services do we slash?……”

          The government’s revenue under status quo conditions, will be highly volatile. They are already going to need to cope with periods of very low revenue, not just from housing. The housing supply issues actually cause economy-wide booms and busts. Better to have stable urban land markets and stable revenue from all parts of the economy.

          “…….Sprawl is already causing issues such as putting a strain on infrastructure budgets and private lives (increased commuting times). How to provide more flexible land use without exacerbating these issues? (notice there’s a conflict where more flexible supply will mean a drop in government revenue whilst increasing the need for revenue to invest in infrastructure…)…..”

          Read Wendell Cox and Ronald Utt: “The Costs of Sprawl Reconsidered: What The Data Really Show”.

          It is simply not true that infrastructure for “sprawl” is more costly than infrastructure for “increased densities”. There is no “rule” regarding this – local circumstances differ widely. A lot depends on the individual city; where the water has to come from, where the energy has to come from, where the sewerage has to go to, topography, etc.

          It also matters very much whether the infrastructure in existing areas was “over-engineered” when it was built, to cope with much higher densities later in its service life. This is usually NOT the case, and “up-engineering” right in the middle of existing, active cities, is always far more costly than doing new infrastructure on greenfields.

          The McKinsey Institute recently posted this article suggesting that city “management” is the single biggest factor in “limits to growth” of a city:

          http://whatmatters.mckinseydigital.com/cities/what-s-the-biggest-limit-on-city-growth-hint-it-s-not-steel-or-cement

  5. Well done again, DE. Keep educating people, because they are living in such a dream world. The main factor for house prices is always the government policy. Housing market is quite different from other goods market, but apart from credit cards, this is the main canal of financial enslaving. The last decades most of the additional income from the second working family member went to the banks profits and growth. But there is always a critical mass beyond which irreversible changes occur. People who don’t have any idea of how the world changes can only dream about passed “belle epoque” when everyone lived with the illusion we all can get rich if only we want to.

  6. Cameron Murray asked:

    3. “Prices are simply capitalised rents, yet rents in Houston are simliar compared to incomes as Australian cities”.

    4. “The question then is why are rents in Houston being capitalised at such high rates”?

    I thought it was common knowledge long since, that in a price bubble with speculators chasing capital gains, the number of “investment” properties tends to rise well ahead of what “supply” for a normal rental market would be. This of course keeps rental rates depressed in the bubble market. And if the “investor” is counting on 10% per year capital gain, he is not going to care so much about how much money he can get out of tenants, if he even bothers with them.

    Some bubbles around the world, they don’t even bother finishing the new dwellings to “livable” standard before “flipping” them, often more than once.

    So it is not that rentals in Houston are “high”, they are “normal”.

  7. Excuse me: You can’t separate supply-side effects from taxation effects.

    If a recurrent “property tax” is levied on a base including values of buildings, it will deter construction and extension of buildings and will therefore restrict supply. If, on the contrary, it is levied on land values only, then it will not deter construction and extension. Moreover, if the lower base value (land only) is compensated by a higher rate, it will become more necessary to generate income from the land in order to cover the tax, so there’ll be MORE construction and extension.

    So unless you make a clear distinction between “property taxes” and “land-value taxes”, the debate will be confused and inconclusive.

  8. Cameron Murray said:

    6. “The State by State comparison doesn’t tell us much, since Texas and New Jersey both seem to have boom and busts (and all the other states you mention)”
    http://research.stlouisfed.org/fred2/data/TXSTHPI_Max_630_378.png
    http://research.stlouisfed.org/fred2/data/NJSTHPI_Max_630_378.png
    http://research.stlouisfed.org/fred2/data/GASTHPI_Max_630_378.png
    http://research.stlouisfed.org/fred2/data/PASTHPI_Max_630_378.png

    LOOK AT THE LEFT HAND SCALES ON THE GRAPHS, CAMERON…….!!!!!!!

    THE CURVES ALL LOOK NICE AND SIMILAR. But the LH scale on the NJ graph goes up to 600, while the scale on the TX graph goes to 200……!!!!

  9. Cameron also said:

    5. “All the ‘responsive states’ have had serious bubbles and prices are down substantially.”

    Where is the analysis of these “serious bubbles”? We have argued this again and again. These “serious bubbles” involved “building too many houses”, with prices barely moving.

    Do the maths. What causes “global financial crises”: Texas building 10,000 “too many homes” at $130,000 each, (in the 1990’s, which homes were quickly filled anyway); or 3 million homes in California inflating in “value” by an average of $300,000 each?

  10. Here is a case study for Cameron Murray. It is hypothetical, although something close to it, happened in NZ in the early 1980’s.

    The government decides to “liberalise” the supply of cars. Local production/assembly is shut down. Import license quantities of the normal level of “supply” are sold by an annual tender process.

    The successful highest bidders import and sell the cars, roughly 1 years supply. All is well, until “round 2” of the annual tender for licenses. This time the successful bidders have bidded higher amounts. This time the price of the cars is higher, and they take a little longer to clear.

    Year 3, the government decides that the prices being tendered are so high, that they will accept the bids of MORE applicants than before. The government banks the applicants cheques, the applicants import their cars…….

    The market can no longer stand the asking prices necessary to cover the cost of the import licenses. Clever finance schemes abound for a while, to try and move stocks of cars at historically abnormal prices.

    When the “bust” comes and numerous car dealers go out of business, the government says “we didn’t restrict supply”.

    Was all this the fault of the “inventive finance” schemes?

    • Phil, as I said – “I certainly believe supply and demand influences the market price of a good. I would certainly believe that in Australia, HAD HOUSING SUPPLY BEEN RESTRICTED, it would show up in rents, and therefore the relationship between rents and prices would be the same over time, but rents would rise as a proportion of incomes.”

      You have just given an example of a quota system. Explain to me exactly how such a scheme exists in Australia? I am happy to take any capital city as an example, with reference to the relevant planning policy and approvals data.

        • That’s kind of my point Leith. While the layout of street in Canberra and public buildings etc was masterplanned, the situation for the past few decades has been very different.

          In fact if you read the plan and relevant codes you will find that, like Brisbane, most residental land development DOES NOT NEED AND APPROVAL.

          http://www.legislation.act.gov.au/ni/2008-27/current/default.asp

          http://www.legislation.act.gov.au/ni/2008-27/copy/65359/pdf/2008-27.pdf (p3 shows single dwellings are exempt from approvals)

          And the items in Schedule 1 of exempt development –
          http://www.legislation.act.gov.au/sl/2008-2/current/pdf/2008-2.pdf

          Again, it is easy enough to find departmental reporting showing the excess of development approvals over executed developments (p 136 – note the leasehold title system in the ACT). What is stopping those people with DAs from developing? Perhaps the market simply does not demand the new supply?

          All we would need to demonstrate some kind of supply quota is a year when the stock of approved land parcels diminshed to zero. If anyone can find that data, I’d be interested.

          • I guess that explains this kind of behaviour hey Cam:

            “The ACT’s government resorted to a “virtual” ballot after buyers camped out for a week in freezing temperatures to secure blocks of land… In Canberra’s Forde, a new suburb 14km north of the city, hopeful buyers spent up to a week queuing and camping… Developers eventually allocated numbers to potential buyers and sent them home… “There were campervans, people in caravans and tents – it was quite a sight,” Mr Lynch said of the buyers queuing a week ago to get a toehold in the Canberra market… “

            And this report from the ACT Auditor General:

            ““the land supply and release process and programs to date have not been effective in achieving the Government’s stated objectives, which include meeting demand, providing affordable land and housing and establishing an inventory of serviced land…. ACT Government agencies have not used a robust model in identifying residential dwelling demand… Agencies have consistently under-estimated the apparent demand for residential dwellings within the ACT, and ACT Government land release targets have been significantly and frequently revised upwards in recent years. Despite the current accelerated land programs, there was evidence of a shortage of the supply of residential land, capable of being built on, to meet the pent-up and on-going strong demand.”

            Sorry, I forgot, the supply-side has NO IMPACT ON PRICE.

          • I might be a bit off target here. But if you look at Canberra as it is today. New release land in Canberra is averaging between $550 and $600 per metre. (For example in a new suburb called Crace you can buy a 375m block for $245,000). Also, unimproved land values (to which rates are paid against) in many areas have increased over 400% over the last 9 years. (www.allhomes.com.au has 90% of Canberra’s real estate info and previous sales histories etc.)
            Up until recently you had to go into a ballet in order to buy property, otherwise you had to go through government selected developers. So sure the policy says one thing, but the actual result is in market today. Which is it’s completely over priced and places Canberra as one of the most expensive places to live in Australia.

          • Imagine a 200Ha island that has zoning. 100Ha residential and 100ha ‘other’. There are currently 100 homes and a potential total allowable number of homes in the residential area of 5000 (because of planning controls).

            You argue that the existing owners of the land inside the zone where there are currently no homes, so 90Ha, can corner the market.

            But, if we rezone the ‘other’ land to residential, or even to ‘build anything’ zone, then magically the existing owners of that land can’t corner the market. Right?

            What if the island was only 100Ha to begin with and it was all ‘build anything’ zoning?

            And what if the island was 10,000Ha? Why does some magic size all of a sudden go from ‘quasi monopoly rights’ to free competition?

      • Cameron, all I am saying, is that a “quota” system does not have to be “restricted in quantity” below what natural growth in demand requires, to force prices up. I think this is your big blind spot.

        I do not give a stuff how many tens of thousands of sections you say are there in “supply” at the fringes of Australian cities, as long as they belong to people who KNOW that NO-ONE can escape their “corner” of supply by forming a co-op and buying a farm another km past where the “planners” say “no more growth”, and building houses on it.

        • So basically because land has an existing owner supply is cornered? There are no subsitutes? There is no competition between developers?

          I really don’t get it. You say quantity restriction don’t matter now? And you say that existing land owners are holding out on development, even though they apply, and get approved, far more development applications than the market can absorb?

          Why would Houston land owners not feel the same way? After all, someone owns all the land already right? It seems your argument has nothing to do with zoning as such.

          Would you rather governments decide how many homes to build?

          • That comment is nonsensical, Cam. If you only allow development within a certain area and preclude development anywhere outside of that area, then developers, pre-existing land holders, etc within the permitted area are granted quasi monopoly rights and have the market power to drip-feed supply onto the market and inflate land prices.

            But if unrestricted substitution between urban and rural land uses is permitted, competition is increased and the opportunities to profit from land banking disappear. This is not rocket science.

  11. Robert Sherlock

    To my understanding isnt Australian Land Tax between 2-3% for non-owner occupied, add sewerage and water rates the % in Australia for investors would be the same or more than Texas. But with Texas property values a quarter of Australia’s, Australian property owners are paying a lot more.

    Note that the full % of tax rate is not charged to owner occupied houses and less for the old as well.

    My tax rates on my investment properties in Texas are around 1.9%, I have gross rental returns of over 15%.

    The more expensive areas generally have higher property tax % in Houston. Newer areas have higher % as well. I think someone used a property my sister purchased for the 2.8%, that is based on the old value (she got a bargain), which will get revised to a lower % of just over 2%.

  12. By the way, I haven’t said, “Great Work Leith” – again.

    Thank goddness someone is going to all this trouble tracking down data and crunching numbers.

  13. What Gary Putland says above I think nails it.

    Tax has a profound effect on property values.

    The question is what kind of tax. You can direct capital investment into land by taxing land over time or as is the case in Australia you can restrict development of land by taxing development of land rather than land itself.

    On the surface; total tax on property without digging deeper does not offer an insight into the government effects in a particular market.

    I agree on your views on restrictive land use policies, the irony being it is a completely conventional economic insight, rather than an unconventional one! For a view into the effect on land values of land use policies I often compare land incapable of development due to restrictive land use policies with land 5km away capable of development or imminently capable. It is many multiples apart in terms of price and there is only one reason…

    These restrictive policies rather than natural alternative use valuation and use push up one kind of land and drag down another but the nett effect on house prices is surely positive, at least in the short term. 😉

    I posted a little more on S and S;

    http://www.simplesustainable.com/topic/4258-houston-some-thoughts/page__gopid__50651

  14. Cameron is once again misleading the reader in his post about rents. He says “HAD HOUSING SUPPLY BEEN RESTRICTED, it would show up in rents, and therefore the relationship between rents and prices would be the same over time, but rents would rise as a proportion of incomes.”

    It is false that a given restriction/shortage would show up equally in rents and in purchase prices. These are driven by different factors. Rent is generally paid out of wage income whereas price is paid with a loan. A structural change to lower interest rates should cause rents of unrestricted fringe housing to fall to keep the return in line with alternatives. Whereas lower interest rates can raise buying prices in superior locations because competing buyers can service higher loans. Plug that into your models Cameron.
    As to rents being flat, that is outright shortage-denier nonsense. Over the last several decades in Sydney the rent of an ordinary house has risen from 1/3 and ordinary wage to 1/2 an ordinary wage. Also our capitals used to have crappy fringe housing available at peppercorn rents. These have totally disappeared driving out the poor. Looking at averages and statistics will give you the wrong impression. There has been a massive rise in rents due to the shortage caused by govt choking supply and poking demand.

      • When you decompose the ABS rental data by capital city, it shows that Sydney’s rents have risen far more than the other capital cities – by around 25% in real terms since the late 1980s (click to view chart).

        The ABS rental series also adjusts rents through hedonics (‘quality adjustments’) which likely masks the true rental increase. I wasn’t aware of this ABS adjustment until a reader pointed it out to me.

        The aggregate rent data has only been flat in the past few years. Between 2006 and 2009, rents rose sharply more or less across the board.

    • I think the critical mistake Cameron is making is confusing land rents with improvement rents.

      Mind you, it’s also a mistake that is made in the US in terms of the taxation base in many of their markets. Taxation should be on land value.

      But the price of a property is not simply the capitalised value of the rental. It is a combination of the (capitalised) building rental , the (capitalised) land value rent, and a speculative component based upon expected increase in the price.

      Only in the situation where a full land tax is imposed can the claim be made that the price represents the capitalised value of the rental of the property. By retaining the second (land rent) component for the community, the third component (speculation) is also eliminated, leaving simply the capital value of the improvements to be recovered.

      • Excellent. I am interested that some intelligent advocates of land taxes have got involved in this discussion. Did you notice the link I posted a few hours ago on this thread, to a 1964 essay by Mason Gaffney?

        I WISH true land taxes would get an honest airing in public political debate. But that is taking this thread a bit off topic.

    • Keep up the good work Claw. I note that you cop a lot of flack around the traps but I happen to believe that you are correct. Not that my opinion is worth much …..

  15. Cameron Murray
    August 25, 2011 at 2:21 pm

    “Imagine a 200Ha island that has zoning. 100Ha residential and 100ha ‘other’. There are currently 100 homes and a potential total allowable number of homes in the residential area of 5000 (because of planning controls).

    You argue that the existing owners of the land inside the zone where there are currently no homes, so 90Ha, can corner the market.

    But, if we rezone the ‘other’ land to residential, or even to ‘build anything’ zone, then magically the existing owners of that land can’t corner the market. Right?

    What if the island was only 100Ha to begin with and it was all ‘build anything’ zoning?

    And what if the island was 10,000Ha? Why does some magic size all of a sudden go from ‘quasi monopoly rights’ to free competition?”

    TT
    August 25, 2011 at 2:36 pm

    “Dude, what are you smoking? Real estate pamphlets?”

    LOL
    LOL
    LOL

  16. Cameron Murray
    August 25, 2011 at 2:21 pm

    “Imagine a 200Ha island that has zoning. 100Ha residential and 100ha ‘other’. There are currently 100 homes and a potential total allowable number of homes in the residential area of 5000 (because of planning controls).

    You argue that the existing owners of the land inside the zone where there are currently no homes, so 90Ha, can corner the market.

    But, if we rezone the ‘other’ land to residential, or even to ‘build anything’ zone, then magically the existing owners of that land can’t corner the market. Right?

    What if the island was only 100Ha to begin with and it was all ‘build anything’ zoning?

    And what if the island was 10,000Ha? Why does some magic size all of a sudden go from ‘quasi monopoly rights’ to free competition?”

    Seriously (I don’t wonder that TT asked what Cameron was smoking) that post neatly epitomises “Cameron Murray’s blind spot”.

    I absolutely agree, and anyone can see, that an island or a very small State (like Hong Kong at one time) can literally “run out of land”, at which point only “demand” matters – but even then interference with “supply” via regulations on building HEIGHT, would distort outcomes away from “market” ones.

    To engage seriously with Cameron’s question, SOME amount of “total land” indeed changes the situation from ‘quasi monopoly rights’ to free competition. Academics from Shlomo Angel to Paul Cheshire to Alan Evans to Wendell Cox, have been saying for some years now, that “20 to 30 years supply of land” is the amount necessary to guarantee free competition and eliminate quasi monopoly rights. I have come to believe that the higher figure is essential – 30 years.

    This is because the cost of outbidding competitors and financing the land holdings thus secured, for 30 years, is never going to be sustained by the possible prices for which the developed properties can be ultimately sold. You can bet land bankers – and their financiers – do sums all the time to decide whether to take the risk or not. 10 years land banking is probably “worth the risk”.

    Another party whose attitudes are relevant, are the original farmland owners. Some will not want to sell regardless, because they love farming and the property has been in their family for generations, etc etc. Many others will be affected by a new mania for “bidding wars” for the land they hold, and milk their position of power for all they can. But when there is 30 years supply, there is simply going to be enough farmers selling “farmland” at farmland price, and not anticipating significant capital gains.

    The “boundary” needs to be constantly shifted to maintain the 30 years supply situation.

    Now here is the kicker. A “boundary” loose enough to have 30 years supply within it, might as well not be there at all for all the difference it is going to make. The academics I quote, pretty much say this. They have calculated “30 years” supply as “necessary to maintain urban land price stability”. But the patterns of development that will take place “within a 30 years supply boundary” will probably be indistinguishable from what would have happened with no boundary at all.

    • One sensible way to ensure that enough land is ‘zoned’ so that land prices do not escalate is the require that local authorities take explicit account of any differences between the price of residential-zoned undeveloped land and the price of other undeveloped land in similar areas. These differences should be reported on by local authorities each year, with a strong presumption that scarcity of zoned land, as reflected in price differences, should prompt action to increase the supply of residential land.

      • That would do, and if the academics I quote are right, the amount that would have to be “released” would be 20 to 30 years worth. Or maybe the THREAT of “release” of land would be enough to rein in the rent-seekers expectations.

  17. My posts are taking a little while to appear. “Planning” advocates will be very upset by the implications of “allowing development” beyond urban fringes, even if it keeps urban land prices low and stable. (How they can sleep at night given the sacrifice involved in NOT keeping urban land prices low and stable, is beyond me).

    But the following academic papers all argue that “leapfrog” development is ultimately MORE EFFICIENT:

    J. C. Ohls and D. Pines, (1975) “Discontinuous Urban Development and Economic Efficiency”; Land Economics Vol 51 (3)

    M. Fujita, (1976) “Spatial Patterns of Urban Growth: Optimum and Market”; Journal of Urban Economics Vol 3 (3)

    S. Titman, (1985) “Urban Land Prices Under Uncertainty”; American Economic Review, Vol 75 (3) (June).

    Max Neutze, (1987) “The supply of land for a particular use”; Urban Studies Vol 25 (5)

    Richard B. Peiser, (1989) “Density and urban sprawl”, Land Economics, Vol 65

    J. E. Moore and L. Wiggins, (1990) “A Dynamic Mills heritage model with replaceable capital”; Papers in Regional Science Vol 61 (1)

  18. Strategic Thinker

    Leith

    I don’t necessarily agree with your position on this one, but I appreciate you doing the research and putting forward the argument. I want to pose a question after providing some context.

    First, may I provide a comment on the City of Playford on Adelaide’s northern fringe. Playford represents one segment of the fringe or greenfield land development market in Adelaide.

    Currently there is fringe land zoned residential in Playford that could accommodate some 26,000 additional dwellings within the Council area (traditional development patterns). There are current plans to rezone land for some 20,000 more. This doesn’t factor in the potential infill dwelling yield that can be achieved under current zoning, which is significant (across metropolitan Adelaide, current zoning allows for the construction of significantly more dwellings than is required in the next 30 years).

    In 2009/10 the Playford Council approved 1850 dwellings. In 2010/11 about 1700 dwellings were approved. However, in 2010/11 only about 1000 dwellings were completed (the highest number in the past 5 years and nearly double that in 2006/07). I will assume here that the 1850 dwellings approved in 2009/10 translated into 1000 dwelling completions a year later, meaning 850 were not built.

    As you are aware, figures from a couple of sources indicate that Adelaide’s block sizes are small and the price per square metre is quite high. You have pointed this out in previous posts. I note that there are 450sqm allotments marketed at $150K within Playford, but different development releases have varying price levels, so this is not necessarily indicative of average prices. Some developments in Playford market smaller blocks at inflated prices. There are perhaps 5-6 large developers competing with each other for market share at the moment.

    In light of the Playford figures I have provided on supply (potential yield of zoned land) and demand (number of approvals), I am interested in your thoughts. Would you still argue that there is an unresponsive land supply caused by planners?

  19. Lots of great comments here. For what its worth (and draw whatever conclusions you will), in nearly 20 years of land development on the east coast and west coast, we have never ever run out of land to sell due to planning restrictions. I also don’t know of any of our competitors who have. When we had people “camped out” for land, it wasn’t because the supply was restricted (we had way more land than people camping out), it was because they had access to cheap money and therefore they could “afford” the better lots. There were still plenty of less desirable lots available. Having said all that, I have not ever worked in the ACT.

    • In a land market albeit our restricted one you will never “run out” of land.

      The price is set by the limited supply and this price is kept high through restrictive land use policies in the same way land is restricted if living on a small island.

      As a land developer surely you must see cheap land which is incapable of development and ask yourself what sort of bucks you could make if you could develop there?

      This is the issue. It is not about a shortage it is about the marginal cost of producing fringe blocks when the choice developers have to procure from is limited allowing sellers to negotiate a price capped only be the demand side of the equation. i.e. the owner gets to say, you are going to make 2million on your 4million investment I want 1.8million. Clearly this both limits the supply of blocks and second those blocks that are released have a higher production cost including procurement.

      Then add the taxes on the development of blocks and you have further cost push pressures that mean developers develop only when the sale price exceeds a very high and unsustainable (due to limited debt serviceability) number.

      Prices drop as they are now and development and building falls away and the government is left pump priming the demand side to get prices back to levels that support their own tax on new supply and restrictive land use policies.

  20. Robert Sherlock

    My sister’s house did not have carpet in it. That is why it is so cheap. The previous owner took it out as it needed replacing and painted the concrete. Which is fine for a cash buyer that wants to rent it out, but not for someone that wants to take a loan out on it. They just got rid of 99% of buyers by doing that and therefore could not sell. It went into preforeclosure and we bought it, around $40,000 under value, 3 offers on the day it was reduced, we got it because we were cash.

    At $123,000 it is around twice the “AFTER income tax” household income in that area.

    Renting it for $1,400 per month, paid $150 to advertise it, taxes including water and sewerage rates, area swimming pool and clubhouse will be around $250 per month, high insurance because my sister is not a resident of USA $100 per month and a home warrenty of $400 per year which covers almost everything insurance does not. About a net of $1,000 per month, almost a 10% net return without capital gains! Note Exxon is opening its world wide headquarters in that suburb 2012/2013.

    Not a bad investment, most 30 year fixed mortgages are just over 4%, so a total cost for ownership would be about $200 per week around a sixth of the after tax household income.

    Link to house
    http://www.har.com/HomeValue/1335-Coppercrest-Dr.-Spring-77386-M48389755.htm

    Note a easy way to convert sqft to sqm is to take off the digit at the end 2500 sqft = 250 sqm, little over estimate but close enough, remember sqft in USA is inside livable space EXCLUDING attic, porches, unfinished storage or garages.