Category: land value

The wrong way to estimate land value

I do appreciate that our wealthy colleagues at the Lincoln Institute of Land Policy have compiled and published estimates of residential land value for states and major metropolitan areas. I just wish they had been more careful.

Geoists are often challenged to demonstrate that it’s feasible to estimate land value.  It’s a fair question, and we have good responses. Assessor Ted Gwartney wrote an accessible paper on the subject, as did Alex Anas and William Vickery (neither on the ‘net, afaik, but if anyone asks I will try to dig up the cites). There are several valid approaches, depending on the specific situation.  For instance, in an area with many teardowns, the value of land is the purchase price of the teardown parcel, plus the cost of demolition. Other methods are used where there’s more vacant land, or new development is taking place, or land is being condemned for public purposes, or land ground leasing is common, etc.  Once you have values for a few parcels, you estimate the remainder by comparing their size, location, and other characteristics to those you have good numbers for.

Lincoln’s estimates illustrate why it’s wrong to estimate land value by subtracting depreciated improvement value from total parcel value. They have undertaken to estimate the land and improvement value for the average single family home in each state, for each calendar quarter since 1975, most recently for the first quarter of 2009.  And they did it by subtracting depreciated improvement value from total value.  Thus they find that the average house in Illinois sits on a lot worth $12,480,  compared to $23,260 in South Dakota. Montana’s average is $69,949, Arizona’s $90,040.  These numbers simply make no sense.

Their MSA estimates are a bit less bizarre, but don’t seem consistent with the state-level estimates.  One reason may be that for the metro’s they could use American Housing Survey information.

It is good that somebody is trying to estimate some portion of land value.  It would be even better if it were done reasonably well.

Lincoln are also starting to compile some comprehensive information on how and how much the ownership of property is taxed in the various states. So far the information seems quite limited, but eventually, if carefully done, it may be exceedingly useful.

btw, with this post I am initiating a new category, “dependent scholars.”  This is to distinguish the employees and grantees of Lincoln (and many many other institutions) from actual independent scholars.

Stumbling onto another land value tax endorsement

Just happened to find it while searching for something else in a Florida library

The killer argument in favour of a national tax on land values for any modern government relates to the effect of globalisation on the tax base. The ability of companies to shift their operations from one tax jurisdiction to another in a world of increasingly mobile capital means that the corporate tax base is likely to erode. This is taking longer to happen than intuition might suggest, but the logic of capital mobility and of transfer pricing by large corporations makes it inevitable. Rich private individuals are similarly prone to shift residence and domicile to minimise their tax liabilities. But it is much harder to shift factories, offices, shops and houses, and impossible to move the ground on which they are built.

The article also includes a prescient observation regarding the housing bubble

Better still, the effect on the housing market would be inherently countercyclical. When house prices and land values are rising, the tax would admittedly with a delay act as a dampener on the boom.

source: One tax to untangle this unholy mess.(real property taxes).
Estates Gazette (Feb 28, 2004): p.50.

POSTED: Assessor candidates debate

An mp3 audio file of the debate is now (February 2, 11 PM CST) available for download here.  At least two of the candidates  (Robert Grota and Sharon Strobeck-Eckersall, of the Green and Republican parties respectively) will be on the November ballot.  The two Democrats, Ray Figueroa and Robert Shaw, may (according to incomplete returns) have been defeated by a third candidate, who did not participate.

Inconveniently, the debate was held less than five days before the election, and it took our co-sponsor  more than four days to produce the audio file. Perhaps next election we will achieve better scheduling. It is also possible that most voters would not choose to listen to a 101-minute discussion on this subject, but at least we had hoped to provide the opportunity.

I will have some comments on the content of the debate subsequently.

Housing cost trends around the world

A great little interactive tool compares house price trends to income trends and general price levels for twenty countries. Be warned that it is flash-based.  Most series seem to go back to 1990.  Relative to incomes, Holland and Belgium show the greatest increases, while the big decliner was Japan.  Thanks to Steve Keen for finding it and providing the link, originally from The Economist. And of course we know that house prices mainly represent the cost of land (including the cost of permission to build).

Crash recovery manual

After the Crash: Designing a Depression-Free Economy.  By Mason Gaffney, edited and with an intro by Cliff Cobb. Published by Robert Schalkenbach Foundation, 2009.

From time to time, a Georgist will suggest to me that one or another politician or academic, who seems sympathetic but ignorant about economics, should be given a copy of Progress & Poverty.  I usually reply that such persons are too famous and wise to be influenced by new ideas or logical analysis.  But now I might propose that, if one is serious about promoting wise economic policy, one might make the investment to give such a distinguished person After the Crash.

Georgists know that the crash could have been avoided by a simple policy of taxing privilege, not production.  But here we are, in a real economy which is doing poorly.  Mason Gaffney explains how we got here, and what needs to be done to get us out. Everyone who wants to understand the situation should read this book.  It is as long as it needs to be– a bit over 200 pages– and doesn’t seem to be available on the free Internet, so unfortunately some of the most vocal advocates won’t read it. Wealthy institutions– Lincoln, Cato, New America, EPI, etc.– could do no better service than to buy whatever rights are necessary to make it widely available.

Although it is listed on Amazon, Schalkenbach seems to offer a much better price.

Here are what appear to be the main points.

1. Speculation in land titles, and other types of privilege, was the main cause of the crash.  It was made more severe because banks and similar institutions financed it liberally.

2. For a job-rich recovery, we need to recognize that some types of capital investment create a lot more jobs than others. The best type of investment for this purpose turns over rapidly. Compare the number of jobs generated by a major infrastructure project— high speed rail, for instance— with the same amount of money invested by small scale businesses in working capital for inventory and payroll. Done properly, this analysis needs to cover the entire time period while the infrastructure project is amortized.

3. Current government policy at all levels focuses mainly on big projects that generate few jobs per million dollars invested.  This involves not only direct government investment, but tax laws and other practices that favor these kinds of investments.  One reason for this is that the beneficiaries– banks and monopolies– have the resources to lobby effectively.

4. Wise policy is to eliminate such programs, but not to create new ones subsidizing job-creating investments.  Rather, if we just let the market function, without taxing labor to subsidize the privileged, the recovery will be faster, broader, and more stable.

5. The “property” (real estate) tax has much better economic effects than income taxes or consumption taxes.  Even though it penalizes building construction, the effect is to channel more investment away from job-poor and into job-rich forms.

6. Banks have repeatedly got into trouble by lending on real estate, with the current crash only the most recent example.  Wise policy would insist that banks make mainly “self-liquidating” loans, such as for inventory or accounts receivable, and require that real estate purchasers provide hefty equity.

There is much much more in this book, and I started to write a much longer review, but will not complete it because no one (including me) would have the stamina to read it.  I will post some pieces of it later. Meanwhile, if you are concerned about our economic future, you should read this book.

“Health” care reform

I don’t see much thoughtful discussion of “health” care reform. (The quotes are because we’re really just talking about medical care.  Health is much more impacted by things like sewers, water treatment, and garbage collection than by physicians and hospitals). So I enjoyed this discussion of the Australian system compared to the U. S., with some talk of  the UK and France thrown in.  Especially the comments are enlightening.

The conclusion seems to be that to make decent medical care available pretty much universally and at a reasonable price, we need to squeeze the providers and work around the insurance companies. One commenter proposes mandatory catastrophic insurance combined with 100% consumer-paid routine care (which, to give this item a Georgist theme, can be funded out of the citizens’ dividend).  This is too reasonable to gain a fair trial in my lifetime.

Walkability pays

Lots of folks like to live at relatively high densities.  Though a big house and yard are nice, they prefer easy access to facilities and services. That’s why land prices are usually high in densely-developed areas (One might say that high price is the market’s way of maintaining  density).

None of this is news to Georgists or observant urbanites, but it’s nice to note that it’s been documented that “walkability raises home values in U. S. cities.” How much? Well, computing a “walkability score” based strictly on proximity to 13 different services (apparently with no consideration of whether there are maintained sidewalks or paths), in Chicago each one point increase (equivalent to one percent of the total range) increases residential land value by $5260.  This incidentally is the highest amount for any of the 15 cities studied

Public transportation is not directly recognized in this study, altho it is acknowledged that walkability is somewhat correlated with transit service.  Therefore part of this value may be due to transit.

The walkability study is among many interesting resources identified in VTPI‘s new compilation and analysis “Where We Want to Be: Home Location Preferences and their Implications for Smart Growth (pdf). “

Minnesota looks at funding transport from land tax

A new report from the University of Minnesota looks at ways of financing transportation projects by capturing part of the benefit they provide.  Land value tax is only one of the eight options  (Land Value Tax,  Tax Increment Financing, Special Assessments, Transportation Utility Fees, Development Impact Fees,  Negotiated Exactions, Joint Development,  Air Rights) considered.

A quick skim indicates that on the whole it’s pretty good, though it seems to overestimate the difficulty of assessing land value, and repeats the error of some previous studies which conflates owners of land occupied by low income people with the low income people themselves. (More likely, low income people are renters living on land owned by someone else, and when taxes on such land increase the owners can’t pass the cost on to their tenants.)

There is also mention of a study, new to me, that seems to document an anti-sprawl benefit from a land tax. The study unfortunately is secured by ssrn; I shall have to try to find it elsewhere.

This study was requested and funded by the Minnesota legislature.

Hat tip to lvtfan.

Chicago medallions rise again.

According to the June issue of Chicago Dispatcher, taxi medallion prices rose again in May, to an average of $170,000.  Here’s some context:

Month                Price               Source
May ’09             $170,000       Chicago Dispatcher
April ’09            $164,500        Chicago Dispatcher
March ’09           $165,000        Chicago Dispatcher
February ’09      $158,000        Chicago Dispatcher
Feb ’07               $  77,000        Chicago Tribune
2004                   >$40,000       Chicago Tribune
1991                     $28,000         Chicago Sun Times

(Chicago Dispatcher data are for the period ending on the 23rd of the indicated month).

I find it remarkable that this kind of real estate has continued to gain value, over 7% in 3 months, while most other kinds in Chicago seem to have declined.  There was, however, considerable fluctuation recently, with sales in late April running around $145,000, increasing to $175,000 on May 19 and 20. According to ads in the Dispatcher, you can lease your medallion out for $600 to $700 per month, a yield of close to 5% (in addition to any price appreciation which might occur).  There is, of course, some risk that the price might depreciate instead.