Is housing scarcity bad for homeowners?

The other day I agreed with noted urban thinker EconomistHulk that we should build more homes by densifying existing urban areas where there is high demand, and also that this densification is frequently blocked by existing property owners for reasons of self-interest.

But Matt Yglesias (who has written an excellent short book on the housing problem) disagrees, arguing that housing scarcity is bad for homeowners, at least financially. The gist of his argument is that if you own a piece of land, then the ability to build more homes on that land is going to make you richer, even if the effect of supply on prices means the price per home is lower. Your neighbours might lose out because the increase in market supply makes their property cheaper, but that's their lookout.

As Matt notes, this begs the question of why we have so much NIMBYism in practice. He suggest it's partly because many people just don't understand how these things work, and partly because property owners attach a large use value to their property which can outweigh the exchange value, i.e. they want to live in the neighbourhood they chose rather than redevelop their land at higher density.

These are good points, but I think there's more to it. For one thing, density restrictions may serve several purposes, and in countries with highly decentralised political systems like the US where many services are funded by local property taxes one purpose is to minimise the level of fiscal 'free riding'. A rule stipulating maximum housing density effectively creates a floor price for housing and a minimum property tax contribution, ensuring that nobody can take advantage of local services without paying roughly the same entry price as everyone else. 'Fiscal zoning' of this kind is basically about keeping the poor out of your neighbourhood, but when key services like schools are locally funded there's a solid financial logic behind it which makes it very popular.

But even leaving these aspects of density restrictions aside, I don't think the home owner's decision is quite as straightforward as Matt suggests. He's right that land is a speculative asset, but as he says it's an unusual one in that home owners don't just own land but live on it too. And, very importantly, each property's value (in use or exchange) depends to a great extent on what does or doesn't happen on neighbouring properties.

The most important fact about urban development is that it creates various spill-over effects, and if you're a homeowner who doesn't plan on moving any time soon you're probably going to want to minimise the possibility of your neighbours redeveloping their property in a way that reduces the value of yours or makes it less enjoyable to live on through effects such as loss of light, traffic congestion and so on*. Rules against densification minimise the risk of this happening, and by buying into a neighbourhood with these rules home owners voluntarily accept a constraint on their own speculative activity in exchange for the knowledge that their neighbours are constrained too. Sure, when they're about to sell up they might be sorry that they can't just build a tower block on their plot of land, but the rest of the time they're probably grateful that nobody can.

To put it another way, Matt is correct that a property owner can increase that property's value by building as much housing on it as the market can bear, even if this extra density damages the value of neighbouring property. But the problem is that your neighbours can do exactly the same thing to you. And if everyone goes hell for leather in redeveloping their own land then you can end up with lower average land values and a less pleasant area than you would if everyone voluntarily agreed to constrain their redeveloping impulses**.

However, the average value of each housing unit would also be considerably lower, so from the point of view of a social planner interested in making housing more affordable this may still be a good deal, especially if you don't think the environmental or amenity costs of density outweigh the benefits. And in many cases there will be an intermediate range where increasing average densities does increase land values. But given the risks involved, the logic of the argument above is that if local planning / zoning rules are basically set by home owners acting in their own self interest then we shouldn't be surprised to see widespread NIMBYism.

* Matt mentions such 'non-pecuniary' factors but doesn't seem to accord them much importance.

** There's a proof of the potential negative impact on land values in DiPasquale and Wheaton's urban economics textbook, which is unfortunately out of print.

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.

Land values and urban history

Via the Urban Demographics blog, here's a short video of Dr Gabriel Ahlfeldt of the LSE discussing his analysis of a unique dataset of land values in Chicago over time. Apart from looking pretty, this kind of analysis is of great interest to urban economists since land values are both fundamental to understanding cities and very difficult to observe in practice, because the value of land is usually mixed in with the value of structures on it. The data Dr Ahlfeldt analyses manages to separate the two out, allowing us to see how much people are willing to pay for 'pure' location as distinct from whatever happens to be built there.

You can see from the video that land values are very high in Chicago's central business district but then drop off sharply as you move out, a sign that people will pay a very premium to locate their home or workplace (mostly the latter, in this case) in that spot. And as Dr Ahlfeldt says, that particular location has been far more valuable than any other in Chicago for the whole period covered by the data.

So even though vast numbers of boats carrying corn, lumber and pork no longer come and go via Chicago's small harbour on Lake Michigan, the legacy of that waterborne trade and the density of businesses and institutions that built up around it can still be seen in the pattern of industrial and commercial location today. This suggests a very important role for path dependency, history and perhaps chance in explaining urban form.

You can see the whole of Dr Ahlfeldt's lecture and many others at the Lincoln Land Institute here.

Utopia postponed - blame housing?

Owen Hatherley asks why those of us with jobs are still working so much when we have so much labour-saving technology. He doesn't get anywhere near a decent answer, and overall it's not a particularly good piece, what with the erroneous claim that the average Briton works a 12 hour day and the suggestion that all service jobs - including Owen's? - are "pointless". But it's an interesting question (go read Keynes), so here's my attempt to answer it.

Let's look at it in terms of supply and demand. More about supply later, but for the moment I think we can all accept that technology improvements have vastly increased the amount and quality of stuff we can afford. Most of us could probably work part-time and have a quality of life - certainly a life expectancy - that most of our ancestors would envy.

Yet we generally choose not to work short hours, and in part that's because we want a much better quality of life than our ancestors had. Our incomes have increased hugely in real terms, but so have our demands for goods and services. In economic terms, most of the stuff we want consists of 'normal goods', i.e. stuff we are willing to spend more on when our incomes increase. It's not clear, however, to what extent this all really makes us happier or to what extent we are just on a 'hedonic treadmill'.

But do we want more stuff for its own sake or because we want to show off to everyone else? Do we desire goods and services for their inherent consumption value or for the social status they impart? Social status is a positional good, something which we value according to rank rather than absolute quality - even if we could all have afford to have good lives, only one of us could have the best, and that seems to matter to us. It does of course help, but only a little, that we don't all share the same subjective rankings.

On the supply side, it obviously matters how the things we want are made. One important aspect is whether the production process is labour-intensive or not. Things that are easily mechanised have generally got a lot cheaper compared to our incomes over time, but things which require a lot of human labour, such as hairdressing or adult social care, have not. That's because you have to pay someone to do it and other people have high income demands just like you do.

I would suggest that the housing market combines many of these features, and may be the most important reason why we continue to work long hours. Housing demand is income-elastic: when we earn more we often spend it on bigger houses or better locations. Housing is positional in the sense of social status (one of the great things about a nice home is inviting people around to envy it entertain them) and in the sense that it is spatially fixed: each home gives us access to a different bunch of locational goods, which in some cases like access to a particularly good school may be extremely valuable. And housing production is intensive in two expensive and relatively scare factors of production: labour and land.

Certainly housing could be cheaper if we built a lot more of it, but I'm not sure whether it would be cheaper in absolute terms (i.e. we'd spend less on it) or in relative terms (i.e. we would maintain our level of spending but get more for it). Either outcome would be an improvement on what we've got now, but not necessarily in terms of fewer hours worked.

Let's get dense

I've been reading Ryan Avent's new book The Gated City, and it provides some good arguments in favour of the point I was making about prosperous cities needing to grow up as well as out.

As I said, in the debate over the National Planning Policy Framework I think there has been an undue focus on the virtues of making land on urban fringes available to develop at low prices, because that will lower costs for businesses and households. Avent's argument, as I understand it, is that we should be most concerned with the costs facing high-productivity or highly growth-promoting firms (and the people they employ), and they are much more likely to want to locate in dense urban areas because of the positive impact of density on productivity, innovation and entrepreneurship. So we should be at least as worried about restrictions on densifying in city centres as we are about restrictions on expansion of suburban areas.

You could argue that this is a false opposition and that cheaper land on the fringe will reduce pressure on the centre. The problem is I'm not sure the two locations are good substitutes. To generalise a bit crudely, those that like fringe locations - sprawl developers, lovers of low density housing and low productivity firms- will benefit from cheaper fringe land, while those who don't - higher density developers, lovers of higher density areas and higher productivity firms - will not. Of course, compact, well-planned urban expansion could potentially give us the best of both worlds, but we don't seem to be very good at that in this country and the current draft of the NPPF doesn't really encourage it.

The bottom line is that real estate prices are generally highest in urban centres. Insofar as that represents the market signalling something, it is a strong signal to build more in urban centres, and only a weak signal to build more on suburban fringes. 'Land supply' isn't everything, at least as it's generally conceived: what we are allowed to do with already-developed land is just as important.

Spaces for cars, spaces for people

At some point early in the previous decade, Britain reached what I think should be considered a significant landmark. The number of licensed private cars in the country surpassed the number of dwellings for the first time: in 1961 there were three dwellings per car, in 1981 1.8, and by 2008 it was 0.98 (though showing signs of stabilising).

Obviously a car is a great thing to have for many people, if they can afford it, and as incomes have grown more people have found it a worthwhile investment. But a decent, affordable home is a good thing to have too, and I think it's interesting to contrast our enthusiasm as a society for allocating more and more space for cars with our hostility towards allocating more space for people to live in, as well as the very different government policies applied to each case.

Considering how expensive and cramped the housing in much of the country is, you might expect society in general and the various levels of government to be constantly striving to increase the housing stock. But what you actually see is amazingly energetic and committed grass-roots efforts to constrain the growth of the housing stock, which are then reflected in a very restrictive set of government policies. By contrast, people and government in most parts of the country seem united in their determination to increase the amount of car parking available. It's rational for every individual to want cheap parking for themselves, but the aggregate consequences are fairly perverse: you end up creating places like Hungerford and many similar towns around the country, where there are strict controls on using land for anything except car parking, so that car parking is made cheaper and everything else more expensive.

The growing number of cars is using up more of our time as well as more of our space. The more cars there are on the road, the more congestion there is and the more time each car spends sitting in traffic. And because both space and time are strictly finite resources, the opportunity cost of space and time given up to cars is only going to grow if incomes continue rising over time. We seem to be acting with a collective assumption that allocating more and more space to cars is a costless decision, but it really isn't. Over time we have turned many of our streets from places of movement into places for storing large metal boxes - just because the change has happened gradually doesn't mean it doesn't have very important consequences, many of them negative.

In short, I think the growth in the number of cars represents a significant resource problem for our society, one that seems to be receiving roughly zero strategic attention at the moment. What to do about it is an argument for another day: in general I think a combination of supply caps and market pricing would help a lot, but as we haven't even started having a debate about the issue yet any reasonable policies seem a long way off.

Sources for the graph: Private cars licensed from Department for Transport table VEH0103 here, number of dwellings from DCLG table 102 here.