On the close correlation between build density and land values

Cross-posted from here.

For most towns and cities, the "centre" is literally in the centre, but in some places, such as seaside/tourist towns, the "centre" is the beach. What people pay for is the view over the beach and the sea and that value to the individual is largely unchanged whether you share the view with a hundred other tourists or a hundred thousand other tourists. So the value of the land along the beach front is infinitely high. The value of the land further back is much lower.

So we observe that in newer resorts, there is a solid row of ten storey hotels along the front and behind that are ordinary size homes/residences. Whether you have to walk two minutes or ten minutes to the beach scarcely matters so the land values in the hinterland are much lower and more or less flat, so the huild density is much lower and more or less evenly spread. Picture from here:

We can see that with our own eyes and understand it, but the key to all this is that the same general principle applies to normal towns and cities. Even though the physical land in the "centre" is the same as anywhere else, the same effect (massive disparity in values between the "centre" and surrounding areas) is observed. When discussing land value tax, it soon becomes apparent that people do not have a clue about land values (in terms of absolute rental values or relative or absolute selling prices).

a) So let's completely put tax reform to one side for the moment and look at actual figures:

- Rental value of farm and forestry land (per acre) = between £5 and £100 a year.

- Site premium of a residential plot with a semi-detached (around a tenth of an acre) = between £3,000 (bottom decile) and £11,000 (top decile) a year, with more or less no upper limit in the top decile.

- Rental value of city centre shops and offices = a huge range. They start roughly where residential leaves off. Rents for offices in Manchester are £30 per square foot per year. The upper reaches are pretty insane. Rent for the best retail space in London is £1,000 per square foot per year (allegedly)

b) So the ratio between the rental value of average residential land and average farmland is about one thousand; the ratio between land used for office space in Manchester (assuming a ten storey block etc) and average residential land is one hundred; and the ratio between central London and normal Manchester is another ten (or whatever) on top of that. Multiply all those up and there is a ratio of one million between the highest and lowest rental values on a per area basis.

c) Even if you are baffled by these numbers or the fact that the ratio between the highest and lowest rental values is something like one million (meaning that Central London has a higher rental value than the whole of Aberdeenshire), land values are made clearly visible by how densely built an area is.

For example and simplifying this a bit and looking at residential only in a typical large town and ignoring particularly posh or grotty areas:

City centres = skyscrapers with no gardens and just a few public parks. There can be hundreds of dwellings per acre, depending on how tall the skyscraper is and how big the flats are.

Inner suburbs = blocks of flats or terraced housing, between twenty and fifty dwellings per acre. Small gardens if any.

Outer suburbs = mainly semi-detached, between ten and fifteen dwellings per acre.

Commuter towns, market towns, rural areas = have the most detached houses, densities of less than ten homes per acre, could be less than one for scattered farmhouses. There is a premium attached to being in The Green Belt (the Faux Bucolic Rural Idyll) but this is offset by the negative premium attached to being far away from town centres (where the best paying jobs are).

d) The density is fairly proportionate to land values. We can plot this thusly:


e) "Hang about here," shouts the crowd, "If we divide the rental value by the density, the answer is always about £4,000. Do you mean to say that the site premium is about £4,000 wherever you live? That flats cost as much as semi-detached houses?"

Yes, that is exactly how things are.

If you go to BBC House Prices and choose a small area (like Aberdeen City), you get the following average prices:

Semi-detached - £224,152
Terrace - £161,975
Flat - £148,775

which is what you would initially expect. But if you look at a larger region (the whole of Scotland) you get the following:

Semi-detached - £148,147
Terrace - £131,792
Flat - £122,915

which is a smaller spread. The figures for the whole of the UK are as follows:

Semi-detached - £209,098
Terrace - £209,808
Flat - £245,533

Yup. The average selling price of a flat is higher than the average selling price of a semi-detached because a disproportionate number of flats are in very expensive areas (i.e. central London) and they have disproportionately high prices.

f) So the long answer to bullet point 1 is exactly the same as the short answer. The rental value of most dwellings is in a surprisingly narrow band, everybody makes a trade-off between convenience/no garden (city centre) with less convenience/big garden (outer suburbs) with terraced houses falling somewhere in the middle.

Which debunks the stupid argument "If we had LVT, some evil developer would come along and get planning to demolish my house and build flats in my garden instead". For most residential areas, certainly in the outer suburbs or in smaller towns, the optimum use of land is building houses, detached or semi-detached. There is no latent planning gains uplift to be gained by knocking down a house and building two or three flats, because there would be little demand for those flats. People are prepared to live in flats but mainly only because they are in city centres or inner suburbs, where the convenience outweighs the fact they have no back garden and less privacy. Add to that the fact that our hypothetical builder has just knocked down a perfectly good house and has to pay the cost of building the flats, the optimum strategy for 90% of houses is to leave them exactly as they are.