Wednesday, 28 September 2016

David Triggs' Law of Rent

He summed up the recent IU conference with one final thought, he said there are so many theories and explanations regarding land rent (von Thünen, Ricardo etc), but it's actually very simple:

"Rent arises where more than one person wants to occupy any particular plot of land. It arises quite independently of any actions or inactions of the 'land owner'."

Which pretty much covers it. Quite why the rent for one site is higher or lower than for other sites depends on a million and one factors, none of which have anything to do with the 'owner' of any particular site. There are plenty of examples where there is no 'owner', such as the middle of the ocean. If there is oil to be drilled or fish to be caught, that site will have value. And there is plenty of privately owned land in the UK with a rental value of effectively zero.

It also covers all sorts of KLNs, for example "It's about supply and demand. If we built more houses/restricted immigration, there would be more housing to go round and hence lower rents and prices"

Even if that were true, so what? The newly developed land has a much higher rental value than it did as farmland and the rental value of previously developed land falls a bit; the total rental value stays much the same, there will still be high and low value areas etc. The law still holds.

Or this KLN: "How can you say that land is a monopoly? I only own a small number of homes out of 27 million in the UK. I am competing with millions of other landowners."

There are 27-million households in the bidding for those 27 million homes; there is nowhere else for them to go. That is a monopoly which generates higher rents in the more desirable areas, tapering away to negligible rents in the marginal areas (there are plenty of homes in low wage, undesirable areas of the UK where the rent is effectively zero).

You can sub-divide this monopoly as much as you like, once all the other homes in non-zero value areas are taken, for the last remaining available home in a non-profit value area, there will be dozens or hundreds of potential bidders.

All those other occupied homes are off the market and have no influence on the price of the last available one. Even if there are only two bidders, the price that the winning bidder has to pay is rent and is dictated by how much the other person bids; which largely depends on how much he or she earns/can afford to pay, which has absolutely naff all to do with the current 'land owner's' actions or inactions regarding the site.

And so on.

13 comments:

ThomasBHall said...

I liked this simple rule- it is much easier to get than ideas involving "economic surplus". It is quite easy to follow on with why areas with higher wages have higher rents, and why desirable things nearby increase rent etc. I have already adopted this rule in casual conversations on the topic.

Steven_L said...

"... none of which have anything to do with the 'owner' of any particular site."

There is one factor where the landowner (or other occupier) do create the value - the cult of 'celebrity'. Sometimes areas are high rent because rock or film stars live in the neighborhood. Up these parts, houses on Royal Deeside are worth considerably more than houses in equally good locations, with better commutes and less traffic, because it's 'Royal Deeside', and the Queen lives down the road so all the other social climbers moved there.

I reckon that there are people who would pay more to rent a house purely because the landlord was some kind of chav reality TV star. It's sad, but I fear it is true. and I reckon an A-list celeb can add value to a house simply by moving into it.

Mark Wadsworth said...

TBH, it is a genius rule.

SL, no, if a celeb moves in, it might affect the desirability or otherwise of the OTHER homes in the area. But not the one he is occupying. So owners of neighbouring land benefit or lose out due to no action on their part.

Mark Wadsworth said...

SL, I accept that the previous occupant of a home might, in exceptional cases, affect its current value.

So they had to demolish Fred West's old house (as well as out of respect for his victims) because nobody wanted to live there (except maybe weirdos). And some people might pay extra to live in a house with a blue plaque saying some luminary had done his best work while living there. But in either case, it doesn't matter whether Fred West or Isaac Newton or Jimi Hendrix or whoever actually owned the place or was a tenant.

POD said...

If the owner of the site in question has set up a business on some other site in the local area, and if this business has increased the amount that people in the area can earn, then wont this landowner have increased the value of the plot he owns through his productive activities on another plot in the area? I'm not saying that this is any sort of argument against LVT, but doesn't it show that landowners can create part of the value of the land that they own?

ThomasBHall said...

POD- yes, but not in their capacity as landowner! He could be a tenant in the area- he could own. It makes no difference. Yes, many individuals can and do enhance local rental values- the point is, that their owning the land has nothing to do with their influence on rents.

Mark Wadsworth said...

POD, nope.

I have heard that one loads of times and it is irrelevant.

What occupier of Site A does obviously affects the value of neighbouring Site B. But it does not affect the value of Site A. I hope that is clear.

So Apple opens head office in Battersea = makes Battersea slightly more desirable.

As it happens Apple will be renting and all the Apple employees who move there will be renting.

As far as land values are concerned, it would make no difference if Apple owned the whole of Battersea, moved its head office there and sold off all the now higher value housing.

So it is not matter what the landowner as such does, it is what the people and businesses etc in the area do. The effect on land values is exactly the same.

So by simply comparing and contrasting, we see that the landowner's actions are irrelevant to the value of his own plot of land. It is the actions of the occupier of each plot which affects neighbouring plots, whether they are owners or tenants.

POD said...

'many individuals can and do enhance local rental values- the point is, that their owning the land has nothing to do with their influence on rents.'
'It is the actions of the occupier of each plot which affects neighbouring plots, whether they are owners or tenants.'

I get this, but I don't think I said that the owners' owning of the land has anything to do with their influence on rents. If a tenant on plot A affects rents on neighbouring plots B,C,D, and so on, and if this tenant happens to own plot B, then he has influenced the rent of the plot that he owns - not because he owns it but because of his actions in respect of plot A. If so, then it is not the case that rent necessarily arises 'quite independently of any actions or inactions of the landowner', as Triggs' law states. I suppose you could say that the rental value of a particular site arises quite independently of any actions or inactions of its owner in respect of this particular site. Again, this is not meant to be an argument against LVT.

Mark Wadsworth said...

POD, suffice to say the argument is irrelevant.

As long as the state does its job and provides the basic infrastructure and services, the bulk of local land values are created by the actions of business and their employees.

Perhaps all businesses and employees are landowners in an area, so they are creating their own value. So what? At present, they are the ones paying nearly 100% of the tax burden i.e. taxes on output, employment and profits.

If the tax base is shifted to land values, then the tax burden on those creating the value goes down quite markedly - the net payers are the landowners who merely own land in an area without contributing anything further to the economy.

Ben Jamin' said...

The only value we can lay claim to is that for a good or service that we have supplied.

By supplying a good or service we shift demand for other goods, services and natural resources.

Having a Waitrose opening a new store raises house prices in that vicinity. Should Waitrose be able to reclaim that uplift as their own property?

Likewise, the invention of the internal combustion engine turned crude oil from a pollutant to a valuable commodity. Should the revenues from oil really belong to car manufacturers?

If I build a whole city, and a large population moves in, does the uplift in land values belong to me?

Land values are not "created", demand for land is merely shifted. The interesting question is therefore what "creates" aggregate demand?

POD said...

I agree that the argument is irrelevant to the question whether a shift in the burden of taxation to the rental value of land is a good idea (it clearly is a good idea). But a 'law of rent' which states, inaccurately, that rent "arises quite independently of any actions or inactions of the 'land owner'", is not an adequately formulated law of rent.

Mark Wadsworth said...

POD, all right then, try "it is irrelevant who the land belongs to".

Ben Jamin' said...

@ POD

"landowner" is by definition economically inert. What you are thinking of is "land user". Of course most of us are a combination of the two.

The actions of land users do indeed shift demand for other factors of production they didn't supply. Including the location their property occupies. That doesn't give them property rights over that value.

Landowners/ users "create land values" is a very ingrained argument against LVT.

See here.


http://www.forbes.com/sites/modeledbehavior/2015/03/29/the-problem-with-100-land-value-taxes/#1ad6f68469e8