High Land Prices: Added Value or Exploitation?

Brendon Harre
Sep 6, 2020 · 6 min read

Philip George Hayward response to the paper High Land Prices: A Feature or a Bug?

Economist Paul Cheshire found that UK house prices increased after inflation five fold since 1955. But the price of the land needed to put houses on increased 15-fold over the same period. Source

High land prices because of value, is quite different to high land prices because of exploitation of powers to “gouge”.

Your history lesson is instructive as an example of an honorable government providing value; that is, they acted as land vendor in the process of “improving” the land with infrastructure and so on, paying for the improvements with the sale price.

The same is true of some governments at some times and places in history, and also true of private sector operators at some times and places in history. For example, urban growth was often driven in the 1800’s by railway enterprises acquiring land to which they then provided access, and sold or rented at prices that would recover the investment they made. The crucial factor here, in land prices being “of value” rather than exploitative, is competition. As long as there are multiple enterprises obtaining the initially-cheap land on similar terms, and competing for ultimate buyers or renters, the market structure is ideally established for profit to be sought on “volume” rather than monopolistic price-gouging. This is Market economics 101.

In Japan, the railway enterprises that were involved in urban growth tended to retain much of the improved land for ongoing renting and future redevelopment. These enterprises still exist, and still compete with each other. This explains the outlier competitive land prices and redevelopment incentives there, which exists nowhere else in the same form. It is impossible to replicate these outcomes without the same institutional arrangements.

In most suburban growth in the USA, developers competing with each other fund infrastructure and amenity in the same way; the resulting completed housing is extremely good value for money, incorporating the cost of efficiently-provided infrastructure and amenity.

Seitu Coleman, “Alternative Institutional Arrangement for Urban Transit and Intercity Railway Operations” suggests that there is no reason that Railway enterprises could not do developments in the USA on a similar basis to which developers currently do automobile-based development; in fact like Japan, this is how it did happen in the Victorian era but unlike in Japan, governments since nationalized all the rail infrastructure and turned it into monopolies. They also tragically disconnected it from all private-sector incentives for redevelopment and its funding.

The main cause of systemic housing unaffordability is simple price-gouging where land owners have the power to do so. No value is provided in return. This is the explanation for the random nature of urban land and housing prices around the world, which cannot possibly be explained by value provided, local amenity, or local income opportunities. Land prices in many chaotic third-world cities are higher than they are in the USA’s affordable tier of cities. Exploitative price-gouging is the variable of sufficient magnitude to explain these differences. The factor by which land prices can be inflated by sheer price-gouging, can be tens or even hundreds. “Value” — justified recouping of amenity provision etc — virtually disappears in the price-data noise under these conditions.

Governments who acquire land at prices that already incorporate extractive gouging on the part of their vendors, have a hopeless task trying to extract further value to achieve any infrastructure or social-good aims. Sir Peter Hall et al’s massive work “The Containment of Urban England” (quoted extensively here) includes a discussion of how the 1947 Town and Country Planning system was originally proposed to have government intervention to capture value and prevent price-gouging by the lucky owners of land granted rationed rights to develop. However, this element was omitted from the Act, with the result that land prices have inflated by tens of percent per decade ever since. In so far as any complex schemes do succeed in tapping some of the land sale price to fund something of actual value, this is a drop in the bucket compared to the original land-owners gouge. Sadly, this gouge is confused with “just the way land prices are”; it is “in plain sight”, and orders of magnitude worse than price-gouges that businesses will routinely be prosecuted for in goods and services.

As I explain in my essay “The Power and Necessity of Consumer Surplus”, it is perfectly possible for goods and services, including housing, to trend towards better and better value for money over time, as technology improves. The reverse of this, is people being “forced to stand the maximum they can pay” for something regardless of how good or bad it is; all the more likely for a necessity like housing. This is why appallingly dense, crowded, ramshackle, infrastructure-deprived, disease-ridden “housing” in some countries, can cost more than a McMansion in heartland or southern USA. It is like having to pay more to a monopoly supplier of Abacuses, than the price of a PC in a free market.

In your historical NZ example, the government as monopoly land vendor, acted honorably to encourage development, by simply funding infrastructure and passing this cost on in the selling price of land. However, there are plenty of examples around the world today where the government is the monopoly vendor of land, where they “extract” the maximum sale price or rent that is possible, as a source of revenue. Housing under these conditions is systemically unaffordable but taxation may well be lower than otherwise. It is ironic to see libertarians praising Hong Kong for its low taxes, when a major source of government revenue is housing rents that are at least 5 times as high as they should be.

The Chinese government has been the sole vendor of “new” land for urban development since the Deng reforms, and it has consistently been a price-extractor. Of course it funds impressive new urban infrastructure this way, but the prices are so high, it also funds a lot else. It is as if the NZ government in the 1800’s had sold the land you refer to, not just at a price around 3 times inflated so as to pay for some transport infrastructure, but at a price 100 times inflated so as to pay for a massive State without any other taxation at all. Whether this would have worked as well under the conditions of that time, is a question. Chinese citizens have no other choice; the NZ government was trying to attract a population in the first place.

At least in China, the gouging prices of land keep the needs for other taxes lower. In the case that lucky private land owners reap these gains, as in the Anglo world, it represents the biggest inter-generational wealth transfer in history (as Prof. Robert Bruegmann put it). It is not just the lucky private owners of all land for new urban use, it is the price of all existing property which is derived from “what new land is available”. It is ironic that a basis for rationing land for urban growth is that “we can’t afford the infrastructure” anymore, and yet the resulting burden of housing costs on the young is so great, that had it been imposed as a fee to fund the infrastructure that would keep housing affordable, it could have paid for a lot more than just this infrastructure — but the outcry at the magnitude of the imposition would have been politically unmanageable.

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