On speculation, land value tax, and mantras

An addendum to yesterday's post

Yesterday I wrote “Big Leaps in Development tend to stall out.” I wasn’t entirely happy with how it came out, so I edited the post a bit to make the key points more clear. Apologies to my email subscribers, edits don’t propagate to emails already in your inbox. If you haven’t read it yet, I’d recommend you go to the web version rather than reading from your email.

Today I wanted to follow up with an addendum sparked by two interactions on Substack.

On speculation and land value taxes

My feeling that I hadn’t got my original post quite right was confirmed by this comment from

bnjd

(emphasis added):

Incrementalism is not a solution to Midtown's problem. If it were, there would already be incremental development there. The problem with Midtown is the greedy land speculators who can afford to hold because their tax appraisals are too low. This leaves us in bizarro world, where nobody builds there because the land is too valuable. LVT! Interestingly, in the late 1800s, a printer named JJ Pastoriza was buying up land in Midtown and built a shoddy cabin on one lot, which he donated to the local Georgist league that he founded.

Well, yes and no. The problem is indeed the “greedy land speculators,” and the end result is “nobody builds there because the land is too valuable.”

But, a couple thoughts:

First, everyone is a greedy land speculator. Some people explicitly speculate on land professionally. Some people do it as an unsophisticated one-off investment project. Some people just happened to already own the land and don’t want to be the “suckers” who sell for less than it’s really worth.

We can see the latter phenomenon writ large on the American housing market post-COVID. Prices spiked during the pandemic due to ultra-low interest rates and significant shifts in population. But prices have remained stubbornly high since then, and while many have offered explanations of this I think it’s really simple. Everyone got evidence from nearby sales that their house value doubled during COVID, and even though sales volumes are have been down for years, nobody wants to be the sucker that lists their home for sale at 2019 prices and sell for “less than it’s worth.”

This becomes a self-fulfilling prophecy, which creates scarcity such that the only market-clearing transactions are highly motivated buyers who probably know they are overpaying. And we also see it in the growing number of de-listings, as sellers give up on selling at all rather than accept a lower price.

But the general phenomenon is that people are incentivized to speculate when there’s a big gap between the present value of a property and the “obvious” future value of the property. Large scale redevelopment creates that gap by definition, while incremental development doesn’t. A stable and liquid market that undergoes continuous incremental development will ultimately add more units than a wave of large-scale redevelopment that stalls out in the face of land speculation.

Second, as

bnjd

points out, this is the kind of problem that a Land Value Tax would help solve. But let’s not mince words — the way it would help is by charging everyone more taxes to stay in their homes. That would create more motivated sellers, who would be more likely to lower their prices, which would in theory then prove land value had gone back down post-COVID, which would finally lower the tax bill. I don’t think I have to spell out why that mechanism has been a political non-starter.

I think Land Value Tax is potentially a powerful tool to help fix problems in our cities. But there are two challenges I don’t know how to overcome — emphasis, I’m not saying these can’t be overcome, but that I don’t know how we should do it.

• Adjusting from our current system to LVT will significantly shift who pays how much tax. That’s the whole point. If it doesn’t do that then it won’t help! My hypothesis is the majority of people would be better off in the short-term under LVT, and we’d all be better off in the long-term. But any policy that results in small wins for the majority and big losses for a minority is politically difficult (see also sugar subsidies) to pull off. We’ll need pioneering communities to show us how to pull this off.

• The worst part of Property Tax isn’t that it undercharges for surface parking lots downtown. It’s that the appraisal system is heavily biased in favor of the wealthy who have the resources to protest their assessments, and ends up being deeply regressive in practice. This is not because tax appraisers are evil. In my experience, the people working the tax appraisal system are earnestly trying to be fair and accurate in their assessments. Nevertheless, the system produces unjust outcomes. While I think that LVT should work better, I don’t know how it will overcome the problems inherent to tax appraisal.

My point is that the speculation and taxation problems are really hard social problems that make large-scale redevelopment difficult, and have done so for generations. I think that YIMBY-minded folks need to look at vacant lots in fast-growing, almost unregulated Houston and think a lot harder about why they aren’t turning over.

Removing regulatory barriers to housing is necessary but I don’t think it will prove sufficient to solve the cost of housing by itself. In other words, there are other battles to fight after we fix zoning, and I think we’ll be more successful if we are preparing mentally (and rhetorically) for removing regulatory barriers to be just the first step in a sustained campaign toward housing abundance.

On the idea that “taller is better”

Following a re-stack yesterday I also stumbled across a comment that roughly said I was wrong, because “in high cost areas, taller is better!

The idea is straightforward: the final cost of a home has land in the numerator and number of units in the denominator, so to make homes cheap we should put as many on each piece of land as we can. But that formulation makes an error in its oversimplification of the situation. The true numerator is the city and the denominator is the amount of land that can be built-on city-wide. If we make policy choices that lead us to “bizarro world” where nobody can develop anything because “the land is too valuable,” then it won’t matter that we allow 100 story buildings, they still won’t pencil, and supply will stall out.

A more correct mantra would be “in undersupplied areas, more units is better!” We should pursue policy that results in more total units, regardless of what building type they come in.

But nuance is still warranted. It is, in fact, possible to oversupply a market and end up with a real estate crash. And large-scale real estate crashes have a history of being rather nasty.¹ Our coastal hotspots aren’t in danger of oversupply today, but big problems have a tendency to emerge from aggressive solutions to the last big problem, and we should seek to avoid that if we can.

So a final, even more correct mantra would be something like, “we want to see a flexible, balanced housing market with healthy supply at all price points and easy economic mobility for all Americans.” But you know, that’s not as catchy.

Thank you for the comments!

I’ve been deeply pondering how our cities work and how we can make them work better for more than twenty years now. Sometimes that makes it really hard to explain things. How much context am I taking for granted? Or how much am I over-explaining things my readers already find obvious?

If I keep iterating on a draft until I think it’s “perfect,” I’ll never get there and won’t end up publishing at all. It’s very helpful to be able to write something until it seems “close,” and then use the comments and reception to help me understand what resonated and what didn’t. That wouldn’t work without the thoughtful, engaged community on Substack that gives me feedback on my work.

So, thank you for reading, sharing, and commenting! That’s the fuel that keeps me writing!

1. See also the Great Depression, the Lost Decades, and the current Chinese crisis