Urban expansion: learning from 19th century London

Paul Collier says that African cities should learn from the example of 19th century London when it comes to housing policy. London was able to build decent housing for working people because its building regulations weren't onerously high, because landowners split their land up into separate plots for small firms to build out while retaining ownership themselves, and because the legal system of ownership and tenure was clear enough to allow building societies to lend with confidence.

All good points, but I would just a couple of things. First, 19th century London also benefitted from rapidly falling transport costs, which enabled development to take place on greenfield land. Stagnation in transport technology makes it harder to keep expanding the urban frontier and compels us to try and redevelop existing urban areas.

Also, it's not just African cities but 21st century English cities which could learn from the example of Victorian London, in particular on the land ownership front. What usually happens these days is that a developer buys a large site and then waits for the most opportune moment to develop the whole thing, which can take a long time. This arrangement means you are basically creating a local land monopolist, with all the problems that entails. Ideally, government should instead try to split the task of building the site out between a number of smaller firms, who would then be competing against each other, which should raise both the timeliness and the quality of development. Obviously this is much harder when government doesn't own the land, although the German practice of umlegung (land assembly) seems to be a reasonably close approximation.

If you like your neighbourhood so much then let more people live there

Matt Yglesias has an excellent post here about the lovely city of Santa Monica, which prides itself on its greenness yet has seen barely any population growth in recent decades despite sky-high house prices.

For Santa Monica you can subsitute any number of nice, exclusive places in the US and across Europe. Here in London we have an excellent example in the Royal Borough of Kensington and Chelsea, where the average house price is over a million pounds (pdf) but where the population and the number of households actually fell, albeit only slightly, between the 2001 and 2011 censuses compared to an increase of 8.3% across London as a whole (xls).

Demand for housing in K&C is clearly through the roof, so how come its population isn't growing? The reason is that planning policy, backed up with overwhelming political support from borough residents, makes it very difficult to build any new housing in the area. So very little does get built, so rising demand just pushes up prices.

K&C is a somewhat extreme example (70% of it is in a conservation area!) but the general pattern is widespread. More people want to move to urban areas to be closer to job opportunities or to avail of improvign urban environments, but the people who are already there don't want their neighbourhood to change so they campaign against new housing developments, and politicians dutifully vote those developments down. The supply shortfall pushes up prices, so only the richest can afford to move in and those less well-off either stay put or move to somewhere less nice and/or further out.

I think this is quite a bad situation, because it results in affordability problems, greater segregation by income and environmentally damaging urban sprawl as housing supply is diverted to places further away from jobs and services. And indeed, you hear a lot of concern about these issues in urban political discourse - but what you generally don't hear is any connection being made with all those anti-development crusades that contribute so much to the problems.

Of course there may be downsides to densification of existing urban neighbourhoods in response to rising demand. A lovely neighbourhood may not look quite as lovely when it's had some buildings replaced or some blocks of flats added. Personally I think these things can go either way and some areas would be much improved by densification, but I also think these basically aesthetic considerations are just not that important compared to the effect on people's lives of making more housing available in places where they want to live.

At its root, this is an issue of social justice and of personal ethics. People who care about social justice should be worried about a political process which gives all the power to people who already inhabit a neighbourhood and none to the people who would like to (see Matt Yglesias again). And people who think of themselves as ethical should ask themselves whether they can justify excluding others from enjoying the same neighbourhood they like so much, while adding to our already serious problems of affordability and car-dependent development.

A land value tax would be unpopular for the same reasons that it would be great

I was surprised a while back to find that the Liberal Democrat conference policy paper on housing included a call for a land value tax (LVT), because the current party leadership shows absolutely no interest in implementing one. But then LVT has long been a cause beloved of earnest policy wonks and loathed by politicos. I'll get to why that is in a moment, but first it's worth rehearsing what I like to call the neoliberal-environmentalist-progressive case for an LVT.

An LVT is a tax on the value of land, excluding the value of anything built on it. The logic is that the relative value of different plots of land is nothing to do with the landowner's activities but is purely a product of their locations and the access they grant to amenities, infrastructure and other 'locational goods'. And because land is fixed in supply and location, taxing it doesn't have the distortionary effects that taxing income or consumption might. So because the community effectively creates the value of land, the community should also draw the benefit rather than let landlords get rich by doing nothing.

Part of the attraction - for policy wonks - of an LVT is that it would provide an incentive for valuable land to be used for its most productive purpose. So if you own a plot of land in a great location, the high tax on it gives you a very strong incentive to get as much money out of that site as possible, which might mean building offices or housing or whatever - the point is that you do with that land whatever maximises its value, subject to whatever constraints the planning system sets . This outcome is good for the landowner (who reduces their net tax bill), good for the government (who gets the tax revenues) and good for whoever ends up occupying the buildings on the land, as they get homes or workplaces they would otherwise not have.

But as Duncan Stott Stoddard points out on the IEA blog, there is a significant problem here, in that current planning policy in this country (and most others) is mainly concerned with restricting landowners' abilities to maximise income from their land by building stuff on it. Building something a bit taller than the surrounding buildings is basically illegal across large swathes of this country, as is switching uses from residential to commercial or whatever. Retaining these extremely strict regulations on land use would negate much of the benefit of an LVT. In fact, it would arguably make an LVT quite unjust, in that you would be increasing some people's tax bills while preventing them increasing the income from their land to compensate.

So as Duncan says, an LVT should really go hand in hand with looser planning regulations. That way you maximise both the benefits of an LVT and the benefits of looser planning - the latter because if you loosen up planning policy without an LVT you are basically enriching landowners (by increasing their potential income) again without them having done anything to deserve it. And allowing landowners with valuable land to build lots of housing on it also means that if they pass the cost of their LVT onto those who occupy the land (i.e. tenants or apartment owners), then obviously the more occupiers there are the lower the cost is for each of them. This can mean that the per-household LVT is significantly lower in city centres than it is in the suburbs - which is also a benefit, since people living at higher densities are imposing fewer costs on the community in terms of infrastructure requirements, energy use and so on.

So a combination of a land value tax and looser planning regulations would very likely deliver cheaper housing, more tax revenues, a fairer distribution of wealth, a shift in the tax system away from distortionary income taxes, and a more sustainable and energy-efficient pattern of land use. Who wouldn't want that?

Lots of people, it turns out. In particular you've got all those homeowners who bought into a neighbourhood which then improves around them, driving up the value of their property and generally making them very happy with their lot. Coming along and telling them that actually they should pay a bit more for their good fortune and perhaps consider building a block of flats on their land will probably have this large and vocal constituency reaching for the pitchforks. But as well as the people who have got lucky in the property market, an LVT will probably also incite the ire of anyone who aspires to get lucky in the property market, which is to say pretty much everyone.

After all, just about everyone everyone wants to be that person who buys a property and sees it rocket in value through no skill or effort of their own. Yes it's unearned wealth and so policy wonks will say it raises important issues of social justice and economic efficiency and yadda yada, but everyone wants to achieve huge wealth, preferably without earning it. An LVT says nobody should get away with amassing unearned wealth through locational good fortune without paying some appropriate fee to providence.  In other words, it is an attempt to put a stop to free lunches via the property market. But people like free lunches, and if they don't currently have access to one they like to think that some day they will. And that, it seems to me, is why politicians are scared of land value taxation.

Neverthless, I do think the world would be a better place if we had more land value taxation, and it could happen if enough people get behind it and crank up the machinery of persuasion. Environmentalists, progressives, tall-building aficionados and tax reformers should recognise the benefits, hold their noses and start forming coalitions to lobby for this, because our leaders are going to require a lot of persuading.