May 30th 2009

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Articles from this issue:

CLIMATE CHANGE: Solar inactivity points to further global cooling

EDITORIAL: Australia's biggest financial scam?

CANBERRA OBSERVED: Next generation to pay for Swan Budget

NATIONAL AFFAIRS: Fund infrastructure with a development bank

DEFENCE WHITE PAPER: Glaring flaw at heart of government defence thinking

ASIA: Will China "liberate" the South China Sea?

FOREIGN AFFAIRS: US auto industry meltdown highlights financial collapse

UNITED KINGDOM: Unrestrained greed caused banking crisis

HUMAN RIGHTS: A bill of rights will diminish our freedoms

ILLICIT DRUGS: Cannabis use linked to suicide, schizophrenia

EDUCATION: The Frankfurt School and the war on the West

OPINION: The forgotten factor: land prices

Bill of rights vs. common law (letter)

Beware of 'Plimer contrarianism' (letter)

CINEMA: Cold War metaphor encoded in vampire movie

BOOKS: THE HORNET'S STING: The Amazing Untold Story of WWII Spy Thomas Sneum, by Mark Ryan

BOOKS: HEROES: From Alexander the Great to Mae West, by Paul Johnson

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The forgotten factor: land prices

by John Young

News Weekly, May 30, 2009
Philosopher John Young looks at how housing could be made more affordable for young first home-buyers.

In all the discussion about the economic crisis and its causes, the part played by land prices is nearly always underrated. The unique character of these prices is usually not even recognised.

I am not speaking of the price of the house or other improvements on a site, but of the site itself. A vacant block of land in a desired location may cost a fortune, without any contribution of the owner to the value. In this article I want to examine that question and note some of its consequences, particularly in relation to buying one's own home and in relation to economic crises.

Think of two identical parcels of land, one in the outback, the other in the middle of a city. The second will be worth many times that of the former, mainly because of the advantages conferred by society on that site. There are physical amenities such as roads, water and electricity; there are social benefits such as schools, shops and the opportunities available for work and for mixing with other people.

The price of these two blocks, one in the outback, the other in the city, will be determined by such factors as the above, combined with the relative scarcity of city sites compared with those in the country. The price does not come from anything the owner does.

Yet in modern societies the benefits conferred by the community and by natural factors like climate, a beautiful view or valuable minerals (and by scarcity) flow to the owner. But he did nothing to deserve them!

Look at the plight of young people struggling to save enough to buy a house and land. In Sydney particularly, but in all our cities to a lesser extent, it is often impossible. This is not primarily because houses are expensive, but because the land is expensive.

It is usually necessary to borrow so much that the borrower will be in bondage to the lender for many years, and will eventually pay far more in interest than the house and land originally cost.

Then there's the matter of land speculation. As the demand increases, the price rises. Speculators move in, driving the price higher still. They borrow to buy more land, and the gambling instinct forces the price to unsustainable levels. Then comes the bust.

The British writer and economist Fred Harrison, among others, has charted the part of land prices in recessions. His book The Power in the Land, published in 1983, studied the onset of depressions and how they were preceded by the collapse of land prices which had reached unsustainable levels. His more recent book, Boom Bust, published in 2005, predicted a major depression in the year 2010. Its subtitle is House Prices, Banking and the Depression of 2010.

There is a saying about land: they don't make it anymore. If the price of, say, furniture rises in relation to production costs, this results in more furniture being produced because of the attraction of the better return to producers. Competition then brings the price down. But land can't be manufactured, so the price tends to increase until people simply can't afford to buy. Then comes the crash, with accompanying bankruptcies, unemployment and panic.

The Australian government's first homebuyers grant is supposed to ease the situation for people struggling to buy a home site. But because of the monopoly character of site prices an inevitable effect is to increase prices further, with the extra money from the grant stimulating demand. It was reported recently that localities where first homebuyers have been particularly active have seen a disproportionate rise in prices. This means that the recipients of the grants are getting the benefit of less than the full amount and those buyers not receiving grants are worse off than if the grants had never been given.

The solution?

So what should be done? I'm convinced that the solution has been known for a long time. It was first fully presented by the American economist Henry George in his book Progress and Poverty, published in 1879. His position was accepted by, among many others, Winston Churchill in England and Sun Yat-Sen in China. It was a plank in the Australian Labor Party platform until fairly recent years.

The solution is for the government to impose a levy on the unimproved value of land. The higher the levy the lower will be the selling price of the land, because potential buyers will know they will have to pay that levy each year. So the land will be worth less to them than under our present system.

With this method in full operation land would be cheap and speculation would be eliminated. What would be the point of speculating on a rise in site prices if it was known that further increases in the site's value would be captured by the government?

Lower mortgages

People would buy land at a small percentage of current prices, and therefore need much lower mortgages - if any. Money that now rewards people for something they did not provide would go into public revenue, making it possible to reduce taxes.

The fortunes available to the fortunate and the wealthy from this source would be no more. The power of the banks over the lives of those they currently hold in bondage would no longer be so great.

An interesting fact about this form of revenue-raising is that it reduces the price of the thing it taxes. Whereas taxes usually increase the price of the object taxed, the taxing of site revenue by the government causes the price of land to fall.

But would this system be just? People who own land, particularly their home site, have laboured for years to achieve this. Imagine their situation if their land drops dramatically in value, and they have to pay land revenue to the government as well. They may have intended to pass on the property to their children, but this supposed reform would reduce the value to a small percentage of what it had been.

A first response is that the very great advantages to society would justify some disadvantage to current landowners. But the disadvantages need not be great, except for some rich landowners with millions invested in land. For one thing, the taking of land revenue by the government would be introduced gradually - it would be politically impossible to do otherwise.

The owners would gain in other ways. Other taxes would be reduced, being replaced by this revenue. The resulting more stable economy would benefit all.

Land would be far cheaper to buy; and that must be of immense benefit to the children of those who had planned to help their offspring through the sale of land.

The children would usually do better buying land at a small proportion of what its price would be under the current system than being helped (under the current system) by the sale of their parents' property.

Besides this, concessions should be given in the early period of such a changeover to people who would otherwise experience serious difficulties.

The fundamental reason for implementing this reform is because it is just. Today wealth belonging by right to the community is appropriated by those with no valid claim to it. This in turn leads to the economic distortions and boom-and-bust conditions that plague society.

This is certain: without appreciating the land question it is impossible to diagnose our economic woes adequately, including the current recession. So even a person who thought it is too late to change the status quo should at least try to see the consequences of the present system.

Saner approach

We should try, therefore, to understand the situation and help to promote a saner approach to land values.

A start is to advocate the greater collection by local governments of revenue based on the unimproved value of land. Unfortunately, in recent years local governments have moved away from that practice, and also applied it badly - as when introducing sudden big increases.

I'll finish with an example. A few years ago the Jubilee Line on the London Underground was extended, at a cost of 3.5 billion pounds. Don Riley, in his book Taken for a Ride, estimates that the extension caused a rise of 13 billion pounds in land values. Had this been captured as government revenue it would have paid several times over for the work, without costing the taxpayers or train-travellers anything.

- John Young is a Melbourne writer on philosophical, theological and economic questions. His recent book The Scope of Philosophy is available from News Weekly Books for $20.00.

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