Wednesday, 20 November 2013

Another Confused Economist

Over at Policy Exchange, head of Housing and Planning policy Alex Morton unleashed his new paper “Taxing Issues? Reducing housing demand or increasing housing supply?” onto a credulous public.

The very fact this is not an either/or issue, gets the alarm bells ringing this may not be the most informed analysis.

Alex, like a lot of free-market evangelists, is deeply confused about what gives land its value. Like fellow economist Kristian Niemietz,  he seems to be saying that if we had no planning restrictions, land values would be zero, or close to it (strangely though, this economic rule doesn't apply to Chelsea and Westminster).

"In a functioning land and development market, house prices will be close to the cost of construction, and land value will not vary by use. Except for a handful of cases (e.g. prime central London) land will roughly be the same value across different parts of the country and for different uses.

"A field of land for agricultural use outside London will have the same value as a site with industrial planning permission outside Newcastle. If the market is dysfunctional or is unable to function properly, large and volatile price  differences will emerge."

Phew! It appears Alex can think of no good reason why an acre of land (prime central London excepted) in one location might be more valuable than in another. Outer London, Outer Mongolia, can you spot the difference?

But hold on. A few pages further on, explaining the principles of LVT he writes:

"Land values arise from the advantageousness of location. If two identical semi detached houses are built in the same area, but one is next to a park while the other is not, the one by the park will have a higher selling and renting prices.

"The difference results from its higher land value, in turn caused by the proximity to a particular amenity, in this case the park."

Now imagine that difference was somewhere that paid higher wages, had more opportunities, offered a greater diversity of leisure and shopping facilities. If you are in business do you want access to huge rich market, or a poor small one?

Who wants to be at the margins? Some do, but most want to be where the action is. And they are prepared to pay for it. Difference in location value? How much can you afford to pay for it?


DBC Reed said...

Yeah.These people never pause to wonder why Henry George was prompted to write "Progress and Poverty" by the high price of land in California, which was an unplanned ,practically Wild West, landscape with a very thin population (560,000 in 1870; 38 million now ).
They're all very dim.But dangerous.

Mark Wadsworth said...


The report hints at some of the advantages of LVT (but without explaining how huge they would be) and then runs through a page of tired old KLNs. They can't even think of anything newer than the Poor Widows and Army of Surveyors.

Concludes by saying "No evidence that LVT would 'help' people get on the ladder", well firstly there is (1950s and 1960s in the UK) and secondly so what?

LVT is not just about housing, it is about the whole wider economy.

You might as well do a report on the NHS and say "No evidence that health outcomes will improve if we had LVT" or a report into space travel and say "No evidence that we could get to Mars quicker if we had LVT".

Mark Wadsworth said...

"The very fact this is not an either/or issue, gets the alarm bells ringing"

He's stupider than that. A tax on anything does not change "demand" at all, "demand" is the same, it is "quantity" which might change, i.e. go down if either supply or demand (or both) is price sensitive.

We know that the supply of "land" (i.e. places where people want to live and work) is fixed in the medium term, so supply is not price sensitive, so "quantity" cannot change, ergo price paid cannot change, ergo landowners make smaller profits is all that happens.

LVT also acts as a bit of a stick to get derelict buildings and vacant sites back into use, so rather unusually, LVT would tend to increase supply.

What's not to like?

Bayard said...

I refer you to the imagined conversation in my previous post. Our Homey bigwig must just have found some money down the back of the sofa.

Mind you quite a lot of people think that the planning system pushes up the price of building land when in fact the main effect is to hold down the price of agricultural land.

Kj said...

Bayard: I think, on the margins, planning does both, even though it on average is less important. It seems intuitive that the rental value/price of land at the border between agricultural/urban land would be different without planning. But go closer to the center of urban land/farther away from urban land, the effect would be small.

Ben Jamin' said...

@ Bayard & KJ

Would you both therefore say a good analogy for planning regs, like the Green Belt, is a dam or wear regulating flow on a river?

Artificially high and low just above and below, with the effect gradually tapering off.

As a thought experiment, what would happen to location values if the whole population of the UK had to live in a giant tower block 5 miles high?

Would aggregate land rent change?

Mark Wadsworth said...

Bj, good analogy with dams and weirs.

I've also tried to explain the interaction between planning restrictions and land values using the example of canals and so on.

The government can channel land values from one area to another by preventing development in the former and allowing it in the latter, but that does not materially increase or reduce the total land value.

It's the same as there is a fixed amount of water falling from the sky and flowing out to the sea. You can distribute it differently using pipes and canals and so on, but this does not change the amount of available water.

Kj said...

BJ: yeah. If not entire green belts, I can see the benefits of "fingers" and "islands" of green land instead of an unplanned margin. But this all depends on a case by case basis for each location I guess. If we assume that planning doesn´t severely impact land values on average.
The bit of planning that could be improved though, to allow the market to provide by need, is allowing freer construction on already built sites.

Kj said...

This all reminds me of an example from my festival-going youth. Those who arrived early, would have no problem setting up tents near the arena, and as early goers, there wasn´t much fight about the spots. The "price" is then lower. Then, as more and more people arrive, and the margin moves outwards, the value of those first tents increases. The alternative cost of getting to the main arena and facilities, is getting higher and higher. Even if there was unlimited tent-space outwards, it would only increase the value of having those first rows of tents right near the arena, to the point of people offering pallets upon pallets of beer to exchange for those valued spots/shacking up with the first "homesteaders".

Mark Wadsworth said...

Kj, great minds think alike.

Kj said...

MW: exactly.

Ben Jamin' said...
This comment has been removed by the author.
Dinero said...

Is he suggesting that developers knowingly build more houses than they can actually sell.

Unless the result of the building is such that the supply in total is greater than the demand in total and some houses are unsold then the price is not going to be reduced.

Does not seem likely that they would do that.

Mark Wadsworth said...

Din, the true analogy is not with a conert hall with a fixed number of seats and tickets (i.e. a town hemmed in by a green belt with limited space).

Clearly, if The Stones play a 1,000 seater, they can charge $500 a ticket and sell out, but if lesser known artist plays, he can only charge $40, assuming he wants to sell every seat.

The better analogy is with the open-air festival, the places near the stage are worth more than at the back, and the further back you go, the less they are worth.

So if e.g. The Stones did a free concert on the biggest beach in the world with space for tens of millions of people, only half a million people would turn up, because standing a mile away from the stage is just no fun at all.

But if the people who turned up first could then sell their spaces to people at the back, they would clearly be able to charge $500 (or whatever).

Dinero said...

but the wages at the periphery are lower so the affordability is not affected.

Mark Wadsworth said...

Din, explain?

The main factor on house prices (i.e. land values) is local average earnings.

a) Mainly because higher disposable incomes go into higher rents.

b) The secondary effect is that there will always be "nice areas" and "rough areas" within a town. Even if they are architecturally very similar, wealthy people prefer to live near other wealthy people, away from the hoi polloi, and the hop polloi can't afford to live near wealthy people.

So your argument starts from the wrong end: truer is "Wages at the centre are higher, but living standards are not improved because rents soak up the higher wages".

Dinero said...

Whats to explain - you said it there yourself where you said


"Mainly because higher disposable incomes go into higher rents"

So therefore we have the conclusion that houses are cheaper outside town because the incomes from jobs at that locality are lower or the wages after commuting coststo town are lower.
and so therefore affordability is the same at both locations.

Mark Wadsworth said...

Din, sorry, good, in that case we are broadly in agreement.