Wednesday, 4 December 2013

The Median Multiple

Economists, policy wonks and journalists from all round the World are united in their analysis of the problem of housing affordability. It's all the fault of the Government.

Planning regulations are the cause and location values are the effect. Many economists now call land values "regulation tax" instead.

The tables above are taken from a typical report on the subject by Demographia here .

What the report does is rank 377 cities in USA,  Canada, Australia, New Zealand, UK and Ireland by their median multiple, which is the median house price divided by median household income ie affordability.

With this they also give various examples from the USA linking affordability with planning . Dallas being a perennial cherry picked favourite among economists (there are obvious reasons why the largest cities in Texas are outliers, but these are never mentioned in any of the reports).

For arguments sake, let us agree that yes, in general the higher the median multiple, the more restrictive the planning regulations are. But, going down that 377 list from least to most affordable, it's clear there is another differentiating factor that stands out.

I'm sure the sprawling Dallas Fort Worth metroplex (25,000km2) is a good place to find work and bring up a family. Texas as a whole is now doing well with mineral extraction. It also has a competitive tax regime.
But, if you want, beauty, culture, diversity, heritage and the very highest pay you live and work on the east or west coast.

We are told that supply constraints are the problem but there doesn't seem to be a shortage where the MM is highest.

You can make anywhere more "affordable" by trashing the place and making it less economically efficient. In an unregulated land monopoly this is what you'd get. In the absence of LVT, which would automatically prevent urban sprawl, and help efficiency, we need regulations via planning instead.

In the UK we have seen the effects of applying "free-market" solutions to the land monopoly by relaxing building regulations in 1980. The Parker Morris regulations had given us minimum space standards. With those gone, the effects were inevitable. The smallest homes in the developed World and the highest land values. One fed into the other.

Now we are being told to do the same with planning regulations.


Mark Wadsworth said...

But there are two kinds of planning regulations

- ones which put a maximum limit the amount of housing which can be built (broadly speaking bad, but perhaps necessary in absence of LVT)

- ones which put a minimum limit on building standards, Parker Morris etc (broadly speaking good)

In the UK we have too much of the former and not enough of the latter.

Kj said...

The lack of zoning in that perennial cherry known as Houston, is probably a good thing, it ensures more "right" construction, with the cost of liberal use of land. But the comparison would be much more interesting corrected for the overall tax environment.

Mark Wadsworth said...

Can you enlighten us why you think house prices are so low in Texas, or is it mainly because of their high property taxes combined with liberal planning laws?

And what's "MM"?

DBC Reed said...

Rick Perry ran for president in the primaries last time on a Texas Miracle ticket but fell off his horse when he could n't remember what he meant to cut during a live broadcast. Right wing opinion ,ie most of it in US, is divided between saying Texas is brilliant for having no local income tax or "corporation" tax and saying they have low income taxes etc but a stonking property tax.
An explanation for a plausible miracle (Texas created 40% of new American jobs as well as having its own movie industry ,outlaw C& W and Texas Instruments and High Tech sector as well as oil) is that the stonking-ish property taxes depress house prices to the general enrichment of all which we've been going on about for years.
Meanwhile Detroit which has giveaway house prices does n't have any work so property tax medicine whould n't work there.

Dinero said...

Hong Kong

Hong Kong is at the top of their chart it is the most densley built up and so that contradicts their thesis that shortage of building causes unaffordabilaty.

Mark Wadsworth said...

DBC, re Texas vs Detroit, forget about "house prices" the underlying factor is "rental values" (the Maypole around which house prices dance).

And rents are a function of low taxes on income (= more disposable and better economy), Texas did the sensible thing and siphons them off to fund common expenditure (= lower house prices etc, hooray).

Enough has been written about Detroit and there is little I can add to that.

Din, they just make these things up, don't they?

Kj said...

DBC: re Detroit, true, if one believes that services should *only* be funded by local taxes under all circumstances. If not, LVT would work very well in Detroit.

D: It wouldn´t contradict that thesis that "planning" creates unaffordability, as all land is released on a very tight schedule, and with lots of use-regulations. Hong-Kong land restrictions and speculation caused by too little land rent collection probably do contribute to "unaffordability", even if the density is high.

Kj said...

MW: good point re house prices vs. rents. That´s where credit market particulars come in to explain what other taxes do not do.

Mark Wadsworth said...

As to HK, it is precisely the high density (i.e. the people) which creates the high rental values. If they could build even more, even higher, then rents would go up even more.

There is a direct and unbreakable link between population density, rental values and build density. Trying to separate them or work out which causes which is like trying to imagine a beehive without bees. Or indeed a bee colony without a hive.

And trying to dampen a house price bubble with more new buildings is like trying to cool down a fire by throwing twigs on it.

Dinero said...

The report is concirned with House prices rising as a multiple of median incomes.

House prices increasing as a multiple of income fits in presisely with Ricardos law of Rent.

Just a quick reminder Ricardos law of Rent states that over a certain standartd of living further increases in income go to rent.

I doesn't nessasarily go on indefinately it could level out at 50% of income due to people sensibliaties, but their it is.

DBC Reed said...

With people knocking down houses for "urban farming", please explain how pure LVT with none of Obama's State capitalist investment in Big Auto is going to any good.

Kj said...

DBC: knocking down neighbourhoods not in use is probably an excellent idea. Remember Detroit still has over 700K population, and any city of that size with any activity has land value in it. LVT induces use, where there is one. Lowering of taxes on productivity increases productive activities. That doesn´t mean Detroit will flourish because of LVT, but it will reduce the barriers. There. So come on, nag about how the free market has failed, and right whing yada yada yada. Give it to me.

Kj said...

DBC: further, lots of areas probably do have neglible land value, and they would benefit from a shift into taxing the areas that do, if they still have property taxes on the dwindling liquidation value of the houses. But in the end, ofcourse the city will most likely need state or federal aid to fulfill it´s commitments, and I´m not talking about pensions, I´m talking about schools, cops, that stuff. I have no interest in the public investment in private industry thing re auto industry, but I know you do. But that´s a separate issue.

Ben Jamin' said...

I have skimmed though dozens of academic papers on this.

Their reasoning all go along these lines.

Anything that has a value above the cost of production=market failure.

So far so good, but then,

market failure=government regulation.

It's odd, it really is. There is never ever any mention of the M word.

Monopolies? Never heard of them.

I asked an economists from the IEA what would be the best option regarding the regulation of the water companies. Tax or price caps?

His answer stunned me. Regulation in any form always produces the worst outcomes. So the water companies should not be regulated at all.

In his World, by scrapping price caps, purity standards, waste targets, we would all be paying less for a better product.

No doubt it would be beneficial for the environment too.

Sorry lads, but this LVT thing is going to be an up hill struggle.

We've got tens of thousands of high IQ well funded economists who cannot or will not apply common sense, up against a tiny, tiny few of us.

DBC Reed said...

You've knocked down the right wing
yada yada yada argument yourself in your second post , in case you had n't noticed.
The last thing land taxers in general need is loudmouths claiming that Detroit is a good place to start with LVT.

Mark Wadsworth said...

Bj, some of the more thoughtful Faux Libs rail against monopolies and corporatism, but they always ignore the biggest monopoly of all.

If the state arranges things so that one group can collect unearned super-profits, they call it corporatism. But how is the whole system of landownership not a system by which one group can collect unearned super-profits by constantly increasing the price charged for the same old supply of a non-activity?

As to regulation, there must be some good regulations, like everybody drives on the same side of the road or maximum speed limit on motorways, so you have to look at outcomes.

Clearly, a maximum speed limit of 10 mph on all roads at all times would lead to far worse outcomes, and allowing everybody to drive as fast as they like wherever they like would also lead to worse outcomes, you've got to strike a balance.

And there are clearly bad regulations, like restrictions on drugs which lead to overall worse outcomes. The state has to man up and admit it was wrong and move on.

PS, I bet he did not present any evidence to show that without massive state interference re purity standards, funding, granting of planning permission, compulsory purchase orders etc that any country would have a water and sewerage system as good as we have in most of the developed world.

Mark Wadsworth said...

DBC, Detroit illustrates the point that it is people and businesses who create land values, not land owners. If the big employers shut down and people move away, rental values plummet. That is clearly a bad outcome on whatever level.

What Detroit also illustrates is that having one million homes with only half of them occupied is also a bad thing.

So either they persuade people to move there (because there is no income tax only LVT and homes are cheap) or they just knock down half the homes and have a few more densely populated parts surrounded by farms or something.

Kj said...

DBC: ffs, "loudmouth", you are the one bringing up Detroit at every random moment, and constantly ignoring the economic arguments for LVT in favour of tangential stuff.

Ben Jamin' said...


Let's assume that planning regulation is responsible for market failure.

We know that it costs £200,000 to build a 3 bed detached house with a nice front and back garden.

We also know, that all things be equal, 95% of people would prefer to live in such a house instead of a flat.

So, if we get rid of all planning regulations, this should mean anyone who wants a 3 bed detached house in Mayfair/Kensington/Chelsea etc, etc, will be able to buy one for £200,000 ie the cost of construction, no?

Anything else is market failure, yes?

Mark Wadsworth said...

Bj: "if we get rid of all planning regulations, this should mean anyone who wants a 3 bed detached house in Mayfair/Kensington/Chelsea etc, etc, will be able to buy one for £200,000 ie the cost of construction, no?

Anything else is market failure, yes?"

I must remember that one.

As the Homeys at Policy Exchange said "Well obviously, this wouldn't apply to Central London.."

DBC Reed said...

@KJ "Like a flash it came upon me that there was the reason for advancing poverty with advancing wealth. With the growth of population, land grows in value and the man who works must pay for the privilege." Henry George" Progress and Poverty". So the LVT mechanism does n't work when the population is in decline does it? (You almost certainly think that Henry George is tangential to discussion of LVT.Perhaps you should think of supporting your "arguments" with some third-party evidence instead of calling everything: demographics, public spending, Geography, Economics , infrastructure, politics, the fiscal and monetary systems, Fractional Reserve Banking etc irrelevant to imposing LVT in the most simple-minded manner).

Bayard said...

"So the LVT mechanism does n't work when the population is in decline does it?"

It appears not. If a location is so bad that people will simply abandon land there and walk away, then it doesn't have any value to tax. In fact it is the base level from which all other locations are valued.

Mark Wadsworth said...

DBC, well, we can argue about that, can't we.

Texas = high property taxes, no other (state) taxes = population increasing.

Texas could of course go all Homey on us and replace property taxes with payroll, sales and income taxes, as a result of which its population would start declining again.

Kj said...

DBC: you´ve lost me completely. The HG quote is fine, land values increase when the economy grows. But just answer these simple questions. Is it better to tax land rental values than other tax bases such as sales as income? We believe it is. Now, Detroit definetly have smaller land values than comparable city of it´s size, but it´s not zero. So why isn´t Detroit better off taxing what little land value it has, than taking the equivalent revenue from the base of buildings, sales or income?
No rent-a-quotes, just apply logic please.

Bayard said...

"Is it better to tax land rental values than other tax bases such as sales as income?"

If you rent out a house, part of the rent is for the house (the bricks 'n' mortar) and part for the land. It's quite possible for the land to be worth almost nothing, but the house still to have a value and therefore the landlord is able to get a rent from it, but that rent/value would not be taxable under a system of LVT, because it is entirely for the building and not for the land.

Kj said...

B: correct, and?

Bayard said...

"Detroit definetly have smaller land values than comparable city of it´s size, but it´s not zero."

Pointing out that for LVT purposes, the land value could be zero for large areas, while still having a positive resale value.

DBC Reed said...

You're lost? What's the matter: you thick or something? as you once bellowed at me on landcafe, probably while we we're discussing Detroit!
You are proposing in all seriousness that a city still with a population of 700,000 finances all its public services and basic infrastructure by a tax on declining land values only? What rate of LVT is going to be levied? A ridiculously high level obviously, leading to more abandonment of land and property so lower average land values , a lower tax base and negative tax- feed-back loop.
As I've argued before, LVT works best (works only?) as land price inflationary tax and land value stabiliser while cheap money for growth is invested by either the public and private sector (or both as in Detroit). A good summary of this position is my letter in Financial Times "One kind of land tax" 14 October and the favourable comments by Merryn Somerset Webb in Moneyweek article "The trouble with land value tax.." on 16th Oct. I know you don't like reading round the subject but you have to break with this anti-academic prejudice which is making you look well,...thick.

Mark Wadsworth said...

DBC, I see no need for such invective and if anything you are in the wrong for slagging off Kj for having said something which he never said.

Nowhere did he suggest that Detroit (or any other city for that matter) would be able to finance all its spending from local LVT.

(I've done the workings for this, Greater London probably would just be about able to do so, but pretty much nowhere else.)

Kj said...

DBC: you know I´ve not said it can finance it every need with LVT, just a few posts ago. I said that it would certainly benefit from moving as much tax it can from the other taxes it levies, to the remaining downtown land values. There is apparently still quite a tax burden for those give-away houses, both because of a lag in valuation and too much tax on the buildings bit.

Yes, yes, I know that LVT in your world is just one of many countercyclical measures, and you refrain from discussing economics as applied rather than a quote. Please direct your awkward rage somewhere else, or just answer why Detroit is better off taxing sales, income and buildings rather than LVT (as much as it can).

Kj said...

And by as much as I can, I mean based on assessed land values, not as much as they want to, which you somehow claim I have said. I can´t find where.

Kj said...

DBC: since you view readers letters as academic articles, here are some "academic" articles by someone who I don´t know, but who I´m sure are outstanding gentlemen like you and mr King.

Dusting off a successful tax strategy

In any event, the concept works. Harrisburg, Pennsylvania, is an example often cited by its supporters. The portion of the local property tax on the land itself in the seriously depressed city was increased to a jolting six times that of the tax on buildings. It took three decades, but the number of empty lots or buildings in the depressed city declined from about 4,200 to 500.

retooling property taxes

DBC Reed said...

KJ What do you mean LVT is one of many "countercyclical measures IN MY WORLD "?The real world has many countercyclical policies not least not-quite-zero% interest rates.The problem is these do not include LVT which would block the cheap money going into property. I am proposing counter cyclical spending to the max plus from- here-on LVT.You cannot understand this.

Kj said...

DBC: come on, if you are going to differentiate your model as to dismiss any other application of LVT, I think you should do it properly, like "LVT will only work with funny money spending + nationalised pubs".

DBC Reed said...

Its not me dismissing any other application (version?) of LVT : you're the one insisting that the full rental value plus be extracted from those hanging on in Detroit on the grounds it won't do much good but it won't do any harm. It will do harm to LVT:we should keep well clear of Detroit where without massive counter cyclical measures (ie investment),LVT will get blamed for ever and a day for polishing this city off.So pipe down LVT simpletons!
You show your complete ignorance by talking about "funny money".Do you still think that banks don't create money in Fractional Reserve Banking ? Read Murray Rothbard on the subject; he is as right -wing as you can get.Oh I forgot you know better than the the recognised authorities.All bank-created money (i.e.most of it) is funny money.

Kj said...

DBC: Oh I think it would do good. Do you mean LVT would be blamed the same way those other cities in the US who have shifted to land values have gone down the drains and marred the reputation of LVT? Or those famous stories where reducing taxes on sales, buildings and incomes have destroyed entire communities?

I say funny money because it annoys you.

DBC Reed said...

@KJ All what cities in the US have shifted to "land values"? Harrisburg, Allentown etc still have local income taxes!These PA towns go in for a split rate property tax not LVT. The effects of these is to lower the tax take because in PA there is not much differential between land values in different areas so mansions can sit on quite cheap land.If you wanted to tax existing wealth ,as you seem to be suggesting for Detroit ,(although you constantly change your ground)you would be better with a straight on property value tax.
Harrisburg the great example to us all ,not, could not afford to buy an incinerator from tax revenue and got into considerable financial difficulties.It has been raising its local income tax rate. Pittsburg,more the size of Detroit( the other PA split rate towns are very small), abandoned LVT years ago.So by all means go ahead with getting all the facts wrong as usual.
"I say funny money because it annoys you".Nothing like setting your sights low - and failing!