Pundits, public policy mavens and environmentalists are working overtime to describe how to make California's housing affordable. Here's the latest from the Davis Vanguard, for one example. Typical policy recommendations include "streamlining" the permitting process, reducing building fees, and a dog's breakfast of public and charitable institutions to provide subsidies or discounts for the (worthy) occupants of such affordable houses.
Ironically, even my environmentalist acquaintances have told me they want fewer environmental regulations to inhibit affordable home developments, and more California Environmental Quality Act (CEQA) exemptions for such housing. Unfortunately, like "streamlining" the tax code, such "simplifications" and exemptions open the door for gaming the system, and seldom provide relief on the scale needed.
Economists are often the high priests who bless public policies, yet current, conventional, neoclassical economics amends classical economics to omit land as one of the elements of productive enterprise. Neoclassicals also ignore the mechanics of money and credit, saying the entire economy is, in effect, a barter economy and money simply enables barter. History says otherwise, but mere facts do not impede such myth making.
Following neoclassical conventions, economists fold the economic input of land into capital, so their modeling reduces classical economics' inputs (land, labor, capital) to labor and capital only. Ignoring land and money meant the gigantic crisis at the confluence of money and land in the subprime / derivatives meltdown in 2007 blindsided conventional economists. Only unconventional economists predicted it (e.g. Steve Keen).
Yet land and credit are critical to understanding our current situation. Rethinking the Economics of Land and Housing (by Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane) explains recent housing price inflation and income inequality, primarily in the UK, by re-integrating land and money/credit into their economic models. The authors conclude that ”it’s clear ... a major driving force in UK house price increases in the last thirty years has been a relatively elastic supply of credit meeting a fixed supply of land along with increased speculative demand for home ownership. Without the existence of a credit- and money-creating banking system, it is impossible to envisage how such huge increases in prices would have been possible given the slower pace of income growth.” (p. 117) They say: “the increase in the wealth-to-income ratio observed in recent decades which has underpinned the rise in inequality has been driven not by productive activity, but rather by increasing residential land values.” (p. 162)
So income inequality, unaffordable housing, even homelessness, are not bugs, they are features! This outcome is baked into the design of the current system. Without examining, and ultimately revising that system, we are only rearranging the deck chairs on the Titanic.
California's property tax system is part of that unhelpful system. Since Proposition 13 reduced revenues, local governments have had to increase building fees to cover their infrastructure costs. If they do not collect such costs up front, their services and infrastructure languish as inadequate maintenance revenue starves them. Another factor seldom mentioned in these conversations: infrastructure for compact infill is roughly half as expensive to maintain as sprawling outlying development.
Speculation inflates land prices in California, too. The speculators can purchase outlying agricultural land for a few thousand dollars an acre, then after persuading local government to bless their development plans, speculators can sell the land to builders for 50 to 100 times more than they paid for it. This also gives the speculators a perverse incentive to develop the worst possible land.
One example: North Natomas is deep floodplain surrounded by weak levees. It is so unsuited to development that a grant to increase regional sewer capacity included a $6 million penalty if that capacity served North Natomas. The speculators were unfazed; they went to then-Vice President G.H.W. Bush and got that penalty payable in installments, and got a $43 million grant to bring those weak levees up to pre-Katrina standards.
There are alternatives. In Germany, developers must sell the land to local government at the ag land price, then re-purchase it at the upzoned price before they can develop such land. All of that 5,000% - 10,000% gross profit--the "unearned increment"--benefits the public rather than lining some plutocrat's pocket.
Germany's public realm is very nice, too. Their infrastructure is first class, college tuition is free even for foreigners, and the arts budget for the City of Berlin exceeds the National Endowment for the Arts for the U.S. of A. Meanwhile, our system reduces Americans to begging for crumbs from the plutocrats' table.
Even residential house price inflation is deceptive. People think they are growing rich as home prices rise--as long as they ignore how their offspring cannot afford homes. But the truth is that banks profit the most from property price inflation since their loans are often 90% or more of the purchase price.
Taxing bank profits, or land itself would eliminate this incentive for house / land price inflation. In California, Proposition 13 does just the opposite. The evidence is that increasing taxes on the monopoly rent implied by land ownership actually decreases prices by discouraging speculation (see realestate4ransom.com for more about that).
One bit of good news is that a revision of Proposition 13 to eliminate its loophole for commercial properties will soon be on the ballot (see makeitfairca.com). The current Prop 13 loophole lets commercial propery transactions avoid reassessing to current values. Thanks to this loophole, a Silicon Valley billionaire can buy a Santa Monica hotel, splitting ownership with his wife and son, without changing the tax assessment. The hotel remains taxed at its 1978 price, in effect. This costs the state roughly $11 billion a year. It also discourages new businesses who want to build their own facilities--they cannot get that tax discount grandfathered into new construction.
So California has CEQA exemptions for plutocrats building stadiums, and loopholes for commercial property, but can't even discuss the real means to make housing affordable. Finland has significantly reduced homelessness--they give people homes--but we're too busy favoring billionaires to do that.
And it's not because California can't afford such solutions. The evidence says "housing first" (the Finnish solution) is actually cheaper than hassling people with police and treating them with emergency rooms, which is what we do now. The problem exists because current practice is designed to shovel money to the billionaires, while impoverishing the public realm. The fact that most of the "solutions" ignore the basis of the problem is a symptom of the systemic failure of civic design and discourse...even when Democrats run the state.
More from Rethinking the Economics of Land and Housing
p. 73: “In the heyday of laissez-faire liberalism itself, it became apparent that only collective intervention into the land market could provide the infrastructure that society and the economy required.":
p.186 “...increasing household debt-to-GDP ratios may repress consumption demand and lead to less demand from firm for borrowing for capital investment…. Empirical research has found that this phenomenon played a key role in causing the Great Depression and the 2008 financial crisis….”
P. 196 “In South Korea, around half of all residential land development and almost all industrial land development is carried out by the Korean Land Corporation (KLC)”
Note: A version of this appeared in the Davis Vanguard.
Ironically, even my environmentalist acquaintances have told me they want fewer environmental regulations to inhibit affordable home developments, and more California Environmental Quality Act (CEQA) exemptions for such housing. Unfortunately, like "streamlining" the tax code, such "simplifications" and exemptions open the door for gaming the system, and seldom provide relief on the scale needed.
Economists are often the high priests who bless public policies, yet current, conventional, neoclassical economics amends classical economics to omit land as one of the elements of productive enterprise. Neoclassicals also ignore the mechanics of money and credit, saying the entire economy is, in effect, a barter economy and money simply enables barter. History says otherwise, but mere facts do not impede such myth making.
Following neoclassical conventions, economists fold the economic input of land into capital, so their modeling reduces classical economics' inputs (land, labor, capital) to labor and capital only. Ignoring land and money meant the gigantic crisis at the confluence of money and land in the subprime / derivatives meltdown in 2007 blindsided conventional economists. Only unconventional economists predicted it (e.g. Steve Keen).
Yet land and credit are critical to understanding our current situation. Rethinking the Economics of Land and Housing (by Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane) explains recent housing price inflation and income inequality, primarily in the UK, by re-integrating land and money/credit into their economic models. The authors conclude that ”it’s clear ... a major driving force in UK house price increases in the last thirty years has been a relatively elastic supply of credit meeting a fixed supply of land along with increased speculative demand for home ownership. Without the existence of a credit- and money-creating banking system, it is impossible to envisage how such huge increases in prices would have been possible given the slower pace of income growth.” (p. 117) They say: “the increase in the wealth-to-income ratio observed in recent decades which has underpinned the rise in inequality has been driven not by productive activity, but rather by increasing residential land values.” (p. 162)
So income inequality, unaffordable housing, even homelessness, are not bugs, they are features! This outcome is baked into the design of the current system. Without examining, and ultimately revising that system, we are only rearranging the deck chairs on the Titanic.
California's property tax system is part of that unhelpful system. Since Proposition 13 reduced revenues, local governments have had to increase building fees to cover their infrastructure costs. If they do not collect such costs up front, their services and infrastructure languish as inadequate maintenance revenue starves them. Another factor seldom mentioned in these conversations: infrastructure for compact infill is roughly half as expensive to maintain as sprawling outlying development.
Speculation inflates land prices in California, too. The speculators can purchase outlying agricultural land for a few thousand dollars an acre, then after persuading local government to bless their development plans, speculators can sell the land to builders for 50 to 100 times more than they paid for it. This also gives the speculators a perverse incentive to develop the worst possible land.
One example: North Natomas is deep floodplain surrounded by weak levees. It is so unsuited to development that a grant to increase regional sewer capacity included a $6 million penalty if that capacity served North Natomas. The speculators were unfazed; they went to then-Vice President G.H.W. Bush and got that penalty payable in installments, and got a $43 million grant to bring those weak levees up to pre-Katrina standards.
There are alternatives. In Germany, developers must sell the land to local government at the ag land price, then re-purchase it at the upzoned price before they can develop such land. All of that 5,000% - 10,000% gross profit--the "unearned increment"--benefits the public rather than lining some plutocrat's pocket.
Germany's public realm is very nice, too. Their infrastructure is first class, college tuition is free even for foreigners, and the arts budget for the City of Berlin exceeds the National Endowment for the Arts for the U.S. of A. Meanwhile, our system reduces Americans to begging for crumbs from the plutocrats' table.
Even residential house price inflation is deceptive. People think they are growing rich as home prices rise--as long as they ignore how their offspring cannot afford homes. But the truth is that banks profit the most from property price inflation since their loans are often 90% or more of the purchase price.
Taxing bank profits, or land itself would eliminate this incentive for house / land price inflation. In California, Proposition 13 does just the opposite. The evidence is that increasing taxes on the monopoly rent implied by land ownership actually decreases prices by discouraging speculation (see realestate4ransom.com for more about that).
One bit of good news is that a revision of Proposition 13 to eliminate its loophole for commercial properties will soon be on the ballot (see makeitfairca.com). The current Prop 13 loophole lets commercial propery transactions avoid reassessing to current values. Thanks to this loophole, a Silicon Valley billionaire can buy a Santa Monica hotel, splitting ownership with his wife and son, without changing the tax assessment. The hotel remains taxed at its 1978 price, in effect. This costs the state roughly $11 billion a year. It also discourages new businesses who want to build their own facilities--they cannot get that tax discount grandfathered into new construction.
So California has CEQA exemptions for plutocrats building stadiums, and loopholes for commercial property, but can't even discuss the real means to make housing affordable. Finland has significantly reduced homelessness--they give people homes--but we're too busy favoring billionaires to do that.
And it's not because California can't afford such solutions. The evidence says "housing first" (the Finnish solution) is actually cheaper than hassling people with police and treating them with emergency rooms, which is what we do now. The problem exists because current practice is designed to shovel money to the billionaires, while impoverishing the public realm. The fact that most of the "solutions" ignore the basis of the problem is a symptom of the systemic failure of civic design and discourse...even when Democrats run the state.
More from Rethinking the Economics of Land and Housing
p. 73: “In the heyday of laissez-faire liberalism itself, it became apparent that only collective intervention into the land market could provide the infrastructure that society and the economy required.":
p.186 “...increasing household debt-to-GDP ratios may repress consumption demand and lead to less demand from firm for borrowing for capital investment…. Empirical research has found that this phenomenon played a key role in causing the Great Depression and the 2008 financial crisis….”
P. 196 “In South Korea, around half of all residential land development and almost all industrial land development is carried out by the Korean Land Corporation (KLC)”
Note: A version of this appeared in the Davis Vanguard.
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