Fix planning rules to reduce inequality

ScreenHunter_06 Feb. 17 11.40

By Leith van Onselen

The Financial Times‘ Robin Hardin has produced a thought-provoking article arguing that the best way to reduce inequality is to relax supply-side constraints on urban land supply and make homes homes more affordable:

About 40 per cent of the stated wealth of the UK – more than £3tn – does not exist. It is a terrible illusion. For the US the figure is about 12.5 per cent of total wealth, or $10tn, and growing fast.

The “assets” in question are what planning or zoning restrictions have added to house prices. They are the ransom that renters and recent buyers must pay to existing homeowners – whose homes the rules protect – for use of an artificially limited stock of housing. So severe have those restrictions become that the value of the ransom runs into the trillions…

It is wealth created not by improving our living standards but by making them worse… It is not earned by skill or effort…

A far better way to [alleviate inequality] would be building more homes. That would turn the false wealth of planning restrictions into the real wealth of houses and flats in places where people want to live, improving living conditions and creating jobs along the way.

…only 10 per cent of the value of land in expensive cities is due to its natural scarcity. The rest is planning restrictions…

Planning rules may seem like harmless bureaucracy. They are not. These rules have added billions and billions of dollars to the price of housing, money that must be paid to those who already own houses by those who do not. If we want to make society fairer and more equal, just let people build.

Can’t say I disagree. Wherever strict planning rules have been enacted, land prices have surged, significantly raising the cost of housing, at the same time as lot sizes have shrunk. Existing land owners have benefited greatly – experiencing a huge increase in wealth – whereas those that now wishing to enter the market (or future buyers) are required to pay astronomical prices, and take-out mega-mortgages in the process.

Other things equal, strict planning have result in a transfer of wealth from the young to the old, as well as poorer members of society to wealthier members (especially those with large land holdings).

An obvious solution to this problem is to unwind the supply-side barriers that have restricted land/housing supply in the first instance, such that land prices deflate to more normal levels and homes once again become more affordable.

A complementary solution, not mentioned by Robin Hardin, is to implement a broad-based land values tax, so that the burden for taxation is transferred from productive effort – e.g. labour – and transferred to those who have not gained their wealth through hard work, but by lazily sitting back and watching their land holdings rise in value.

The Henry Tax Review agreed when it concluded in 2008 that “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases”.

[email protected]

www.twitter.com/leithvo

Comments

  1. Exactly. Here in Victoria, Plan Melbourne is a form of retail price maintenance that the supine ACCC would reject if privately erected.

    Rebase taxation to land and resources.

    End the handbrake on productive effort.

    Set my country free.

    The means is already present in State Land Tax. Use it.

    • Hunson Abadeer

      +1 to all of that.

      Land should be a comparative advantage for Australia, instead it’s a giant pyramid scheme and a vacuum for what could otherwise be productive capital.

    • The Patrician

      Yesterday, LNP stategist and rising star Senator James McGrath gave his maiden speech.

      “Taxes on jobs and productivity such as the payroll tax and company tax must be abolished and reduced respectively,” he told the Senate.

      Ok. Good start.

      “To cover the states from loss of income from payroll tax, the GST should be broadened to cover everything and the GST should also be increased to 15 per cent.”

      Why? The states are perfectly capable of raising whatever revenue shortfall is created via state land taxes. The valuation and collection systems already exist. Just broaden the LVT base and/or increase the rate.
      The states want more revenue? They should be encouraged to collect it.

    • Strange Economics

      Yes, in South East Melbourne, apartments are banned in the council plans for 90% of the area for “unneighbourly zones”. Only individual or 2 ($1million) houses per block allowed for 20 km.
      Retail Price Maintenance anyone?

  2. I think we would be better off if planning rules were qualitative rather than quantative in nature. If we are truly concerned about limiting the size of our cities, I think looking at demand side measures, such as reducing immigration, and restricting the flood of easy credit, or even land tax, would be more effective than green belts (which get leapfrogged anyway).

    • if this theory is true why are US states with no land restrictions among the most unequal

      What theory are you asking about?

      • The title of the article is “Fix planning rules to reduce inequality”. Many current planning rules are written by elites to benefit elites, so it is easy to see how scrapping these elitist planning rules would reduce inequality. However I don’t know of anyone claiming that inequality can be “fixed” by merely changing land-use planning rules.

        As to why “are US states with no land restrictions among the most unequal”: This is an interesting question. Probably because the poorest people must move to these places to get housing. Combine so many poor with a few rich people and you get most unequal. By contrast US states with severe planning restrictions use high price to filter the population and lock-out the poorer segment of the population. Only the rich can afford to be there.

        Why does the average bus have more unequal passengers than the average Rolls Royce?

      • Well-made point, Claw.

        If all US cities had seriously unaffordable housing as the result of blanket growth containment restrictions applying to them all, I suggest the overall result at the national level would be very much worse.

        There is also the point that the affordable-housing cities have a lot more young people who by definition earn less. Los Angeles apparently has the oldest average population in the USA, consistent with it being the least affordable city.

      • Gini coefficients are easily skewed by a couple of seriously rich bastards, of which NYC has quite a few, including Uncle Rupert.

        If Prince Charles shared a Rolls with one of his younger brothers, the Gini coefficient would be greater than any bus on the planet.

    • But this article suggests something quite different re gini inequality by State:

      http://online.wsj.com/articles/stephen-moore-and-richard-vedder-liberal-blue-states-have-greater-income-inequality-than-conservative-red-states-1401923793

      “……According to 2012 Census Bureau data (the latest available figures), the District of Columbia, New York, Connecticut, Mississippi and Louisiana have the highest measure of income inequality of all the states; Wyoming, Alaska, Utah, Hawaii and New Hampshire have the lowest Gini coefficients. The three places that are most unequal—Washington, D.C., New York and Connecticut—are dominated by liberal policies and politicians…..

      “……Texas is often regarded as an unregulated Wild West of winner-take-all-capitalism, while California is held up as the model of progressive government. Yet Texas has a lower Gini coefficient (.477) and a lower poverty rate (20.5%) than California (Gini coefficient .482, poverty rate 25.8%)…..”

  3. Hugh PavletichMEMBER

    New Zealand Labour has massive problems – Whale Oil Beef Hooked | Whaleoil Media

    http://www.whaleoil.co.nz/2014/07/labour-massive-problems/

    … but the issues are much deeper than New Zealand Labour / David Cunliffe …

    Voters have had enough of bloated and dysfunctional governments – Telegraph

    http://www.telegraph.co.uk/finance/economics/10844203/Voters-have-had-enough-of-bloated-and-dysfunctional-governments.html

    US Gallup Poll: Number One Problem Government … Global Economic Trends Analysis … Mish (Mike Shedlock)

    http://globaleconomicanalysis.blogspot.co.nz/2014/01/gallup-poll-us-1-problem-is-government.html