Killer Arguments Against LVT, Not (233)

Paul Perrin, over at the IEA blog:

Mark, what if you are happily living in your home, then the council decideds to grant planning permission for a shopping centre on your plot? Your tax bill makes your whole plot is valueless to anyone other than a major property developer... how do you get out of you £1,000,000 monthly LVT? Surrender the land (with your home on it) to the council?

There's no basis for his assumptions that:

a) I will ever own a garden big enough to build a shopping centre on, or
b) The annual rental value of land used for shopping centre is a hundred times higher than for residential, or
c) Councils go round granting planning willy-nilly before anybody has applied for it (except to the extent they do 'zoning').

i. In real life, if you look at any smaller area there's surprisingly little difference in the rental value earned on neighbouring plots of land - be that residential, commercial, shops with flats above or car park - for the simple reason that, by and large and in the very long run, most land is put to something approaching its best use, despite the best efforts of NIMBYs and planners.

ii. If you realise your neighbour's plot is earning £30,000 a year as a car park and you're only getting £20,000 a year rent from a shop, you'll knock down the shop and lay some tarmac. This pushes down the amount that you or your neighbour can charge for daily parking, and now there are two cheaper car parks (each owner gets £25,000, down from £30,000), so the rental value of a shop goes up a bit to £25,000 and the equilibrium is restored.

iii. We know that of developed urban land, the vast majority (80%?) is used for residential. Retail and offices tend to be concentrated in the middle of town (industrial is usually out-of-town nowadays, let's ignore that for the purposes of this debate).

iv. By definition, the retail/office area only spreads out as far as it needs to; at the edge of the 'middle of town', you'll find a mix of residential and commercial; houses next to shops; flats above shops; little workshops between houses; petrol stations on main roads; corner shops in housing estates etc. Nobody in his right mind would demolish all the housing in the entire town to build just shops and offices because they'd lose all their potential customers and workers; it is sufficient for the shops and offices bit in the 'middle of town' to cover a tenth or so of the total urban area.

v. If the developer wants to build a shopping centre in the middle of town in place of existing shops and offices, then Paul's scenario does not arise. Neither does it arise if the developer wants to build out-of-town, something which we are constantly told is a very bad thing indeed (the ideal shopping centre would be an out-of-town shopping centre in the middle of town).

vi. If the town has grown outwards, then there may be enough people there to justify building a new shopping centre in the middle of town. If land in the middle of town is already being fully utilised (multi-storey buildings), then best place to build it is at the edge of the existing 'middle of town', which would indeed involve buying up and knocking down houses.

vii. But we know that the rental value of commercial land and residential land at the edge of the middle of town is pretty much the same (or else those flats over shops would be offices over shops etc - see iv.), so the uplift when it is re-zoned from residential to commercial will probably not be very much if anything. The homeowners are unaffected and the developer still has to make them offers they can't refuse.

viii. But how much would the uplift need to be to justify the council granting planning to the developer in the first place? Let's assume he needs to buy up five acres, that's about a hundred homes, each currently paying £12,000 in full-on LVT (assuming no taxes on income or personal wealth) and so the council is getting £1.2 million a year in tax. If the developer offers £1.3 million a year, the council will tell him to get stuffed, it's not worth losing hundreds or thousands of votes for such a small amount. He'd have to offer to pay at least (say) £2 million in LVT a year.

ix. So that's £800,000 extra LVT a year, in perpetuity (plus an unknown amount from any new housing, see x.). The council would also negotiate with the developer that he has to pay a reasonable whack for the bricks and mortar value of those one hundred houses, and to make things politically palatable, the council would earmark the first few years' worth (let's say three years) of that extra LVT income as compensation to those one hundred home-owners.

x. So the home-owners get paid in full for the bricks and mortar; plus £24,000 each for grief and hassle. The council can easily zone another bit of land in the vicinity for new housing and/or stipulate that part of the shopping centre land will be used to provide flats (with the hundred home owners being offered first dibs), so those one hundred households can take their bricks and mortar money plus the £24,000 compensation and either buy a house that comes up for sale nearby; move into one of the new flats or have a new house built on the new estate.

It's all very simple if you look at the real world and then apply common sense. Nothing terrible happens. None of it scares me, there's a one-in-a-hundred chance that it would ever happen to me, and if it does, I'll haggle for as much money as i can get and then move home.