Lessons Learned and Property Bubbles
Crisis after crisis, economies and governments seem destined to make the same mistakes repeatedly. We let property (land) prices rise as interest rates decline, as we direct a disproportionate amount of credit into the real estate market.
A large percentage of consumer spending, capital gains, and employment then becomes tied to land prices, as does the health of banks (and by extension, the financial sector). Once prices inevitably drop, the effects reverberate throughout the broader economy. Property markets in many Western countries are already due for a dip in 2019, and a more painful downturn in the mid-to-late 2020s, according to Georgist land value cycle theories. Credit is repeatedly wasted on land speculation instead of improving productive capacity, and the economy suffers as a result.Incentives also become immensely skewed with rising land prices. During upswings, income from property speculation tends to increase at a faster rate than income from labor. It becomes more profitable to flip houses than to earn income through meaningful employment. Property no longer means a place to live, but has instead become a means to speculate in an attempt to accumulate wealth in the face of stagnating wages and dwindling pensions. Governments accentuate the issue by taking taxes from incomes, and using them to fund infrastructure, which further drives up the value of the landholders’ properties at the expense of income. Some governments further compound the issue with mortgage income tax deductions, and lax rules on minimum home deposits.
Land value is a function of the size, location, and traits of the land. The land value tax (LVT) promotes efficient use of land by discouraging vacant lots, and because tax rates don’t rise as the owners add value to the land, it encourages land owners to build upward. However, just as high land prices close to the city center encourage building/living away from the centre, an LVT (which reflects those prices) would do the same.
The LVT, in its known form, has numerous shortcomings:
• Inadequately addresses urban sprawl, by encouraging building in places of lower land value
• Encourages speedy construction, which can lead to low quality structures
• Encourages rapid depletion of resources
• Doesn’t address architectural standards (their design, cultural and environmental impact)
• Punishes sectors that require space (e.g., agriculture, some industry) to take advantage of scale
• Doesn’t acknowledge private contribution to community land value, by taxing its entirety
• Is best used for infrastructure/government funding rather than minimum income / income supplement schemes
• Taxes businesses that do not yet generate profits (nor revenues)
Why do we want dense cities rather than sprawling ones? Dense cities have the following characteristics:
• Rationalized use of precious space
• Reduced transportation / commute times
• Reduced urban infrastructure costs (shorter metro lines, etc.)
• Rapid dispersal of ideas
• Higher levels of productivit y