The Department of Housing and Urban Development said that fair market rents for fiscal year 2024 will rise about 12 % nationwide and that the department has increased funding for housing choice vouchers.
Isn’t this just giving landlords aid? Nothing meaningful changes for the renters, but the landlords pocket the aid via rent. If they really wanted to help low-income people, what are some better ways to do so?
You are exactly correct. When the supply is constrained, subsidizing demand just means all that aid money gets pocketed by landlords. The best way to help is to build build build.
Any new housing – even market-rate or “luxury” – is good for affordability:
New buildings decrease rents in nearby units by about 6% relative to units slightly farther away or near sites developed later, and they increase in-migration from low-income areas. We show that new buildings absorb many high-income households and increase the local housing stock substantially.
Policymakers have debated whether allowing more market-rate—meaning unsubsidized—housing improves overall affordability in a market. The evidence indicates that adding more housing of any kind helps slow rent growth. And the Pew analysis of these four places is consistent with that finding. (See Table 1.)
As for how to get more built, well, we don’t even need to spend a single penny – we just need to stop making it literally illegal to build anything but low-density sprawl:
Each of these places kept rent growth minimal relative to the U.S. overall, even while demand for housing continued to grow. Between 2017 and 2021, the four jurisdictions saw their total number of households grow between 7% and 22%, while the total households nationally increased by 6%. More households require more homes, and a housing shortage relative to demand drives up rents.
So, how did these high-demand areas keep rents from spiking? The evidence indicates that more flexible zoning helped these places add new housing faster than new households formed or moved in to fill the homes. And that helped slow rent growth. (See Figure 1.) Towns and cities in the same metro areas that did not allow as much new housing generally saw faster rent growth. This trend matches the findings of prior research—that adding housing slows rent growth because there are more homes available. That means households are less likely to be chasing too few homes.
Land value taxes are generally favored by economists as they do not cause economic inefficiency, and reduce inequality.[2] A land value tax is a progressive tax, in that the tax burden falls on land owners, because land ownership is correlated with wealth and income.[3][4] The land value tax has been referred to as “the perfect tax” and the economic efficiency of a land value tax has been accepted since the eighteenth century.[1][5][6]
It’s a progressive, essentially impossible to evade tax that incentivizes densification and development while disincentivizing real estate speculation. Oh, and it can’t be passed on tenants, both in theory and in practice.
And even a milquetoast LVT – such as in the Australian Capital Territory – can have positive impacts:
It reveals that much of the anticipated future tax obligations appear to have been already capitalised into lower land prices. Additionally, the tax transition may have also deterred speculative buyers from the housing
market, adding even further to the recent pattern of low and stable property prices in the Territory. Because of the price effect of the land tax, a typical new home buyer in the Territory will save between $1,000 and $2,200 per year on mortgage repayments.
Yes, almost nowhere in North America currently has land value taxes, including my city. Rather, most places here have property taxes, which are different in a critical way. This video explains the issue well. But essentially property taxes bundle land values and improvement values (i.e., what’s built on the land). The problem with this is it creates a financial disincentive for improving your land while those who wildly underutilize urban land (e.g., for parking lots in downtown or vacant lots) pay pennies in property taxes. This often makes it profitable for speculators to buy up vacant land, hold it vacant (or at minimal use like a parking lot), and just wait for it to appreciate, then sell or rent out at massive unearned profits. And when a whole bunch of others catch wind of this scheme for free, unearned profits, well they start buying up land, too, further driving up prices.
Land value taxes can stop this as they don’t tax you for your improvements but they tax you significantly more for the land you hold. This means the annual taxes you pay on that vacant lot or that downtown parking lot will be more than your expected annual gains from appreciation. Both because your taxes are higher and because appreciation will be less now that holding that land incurs a not-insignificant tax obligation.
Long story short, property taxes make speculation profitable and incentivize land hoarding, while land value taxes make speculation unprofitable and incentivize denser development.
The only thing I’d be concerned about is that if you charge a land tax to everyone as if they’re going to build a mega-walmart on that land, then individuals who would otherwise be able to own land would not be able to because they don’t have institutional money like that.
I don’t really want a world where only institutions and the super-rich can own land because all land is taxed like it might have a mall built on that land.
Land value taxes would actually have (and do actually have!) the opposite effect. First, land is taxed based on its value, much like property taxes are based on the value of the property. This is typically appraised by using fancy statistics. The idea being you don’t tax rural land at anywhere near the same rate (in dollars per acre) as you tax land in Manhattan.
Second is – as the data from the Australian Capital Territory shows – a land value tax makes possessing land an obligation and also reduces upwards speculative pressure on land prices. Thus, land value taxes tend to make land cheaper to purchase. In theory, if you raise land value taxes high enough, you could make land prices approach zero, as the tax obligations start to equal the benefits of owning the land. In effect, such a situation would be functionally equivalent to renting land from the government.
And of course the big benefit of renting vs owning is you don’t have to pay an upfront cost, which means much lower barriers to entry for starting small businesses and startups, and also means you could buy a home without also paying upfront for the land.
Edit:
A good quote by American economist Henry George I think explains it nicely:
The tax upon land values is, therefore, the most just and equal of all taxes. It falls only upon those who receive from society a peculiar and valuable benefit, and upon them in proportion to the benefit they receive.
After all, possessing land is an asset, hence why we’re willing to spend so much money for it. Even by merely possessing land, you can rent it out to someone else for money. This is called the “rental value” of the land. Henry George was famous for advocating that we tax land to the value of the full rental value of land. At this level of taxation, owning land is equally asset and obligation, so its price would approach zero. Thus, regardless of if you owned land or not, you would be at neither advantage nor disadvantage.
It could reduce land speculation, but as you increase the amount of money someone needs just to own land, then fewer and fewer people will be able to own land. Eventually if you raise prices high enough, only the super-rich could afford it because they’re the only ones who can afford to pay the tax. At that point, you’ve re-implemented feudalism, as powerful landlords extract wealth to pay taxes to the king.
As it stands, you need a ton of money just to own land. Roughly speaking, if you think owning a parcel can provide you $1000 of value per year, you might be willing to spend $10k or $20k or more upfront to own it. And last time I checked, people who can afford that much money upfront are disproportionately rich.
But if it’s taxed at $1000 per year, the net benefits to owning the land evaporate, and you won’t be willing to spend money upfront on it. Nor will others, hence the price of land drops towards zero. Neither you nor rich people want to waste money on something that is just as much an obligation as it is an asset.
And that’s the key idea here: to decouple access to land from economic advantage. This is reverse feudalism. In feudalism, it’s all about concentrating control of land to concentrate the benefits of land ownership. With LVT, it’s about taxing away the benefits of land ownership so it’s no longer this precious commodity that is worth hoarding.
Under a “full” LVT, there would be precisely zero economic benefit nor reason to hoard land. You would effectively just rent land from the government if you believed you had a suitable use for it. And renters are statistically poorer, as paying upfront is a massive barrier to entry. Hence why homeowners are statistically richer, because you need money to pay the upfront cost.
Estonia levies an LVT to fund municipalities. It is a state level tax, but 100% of the revenue funds Local Councils. The rate is set by the Local Council within the limits of 0.1–2.5%. It is one of the most important sources of funding for municipalities.[90] LVT is levied on the value of the land only. Few exemptions are available and even public institutions are subject to it. Church sites are exempt, but other land held by religious institutions is not.[90] The tax has contributed to a high rate (~90%)[90] of owner-occupied residences within Estonia, compared to a rate of 67.4% in the United States.[91]
Reducing the upfront cost of land via land value taxes makes land easier to access for the masses, and it makes the peculiar benefits of land more evenly felt. It’s the opposite of feudalism.
Isn’t this just giving landlords aid? Nothing meaningful changes for the renters, but the landlords pocket the aid via rent. If they really wanted to help low-income people, what are some better ways to do so?
You are exactly correct. When the supply is constrained, subsidizing demand just means all that aid money gets pocketed by landlords. The best way to help is to build build build.
Any new housing – even market-rate or “luxury” – is good for affordability:
https://direct.mit.edu/rest/article-abstract/105/2/359/100977/Local-Effects-of-Large-New-Apartment-Buildings-in?redirectedFrom=fulltext
https://www.pewtrusts.org/en/research-and-analysis/articles/2023/04/17/more-flexible-zoning-helps-contain-rising-rents
As for how to get more built, well, we don’t even need to spend a single penny – we just need to stop making it literally illegal to build anything but low-density sprawl:
https://www.pewtrusts.org/en/research-and-analysis/articles/2023/04/17/more-flexible-zoning-helps-contain-rising-rents
Some of the particularly nasty policies responsible for this are restrictive zoning – it’s literally illegal to build anything but detached single-family houses on the vast majority of urban land in this country – and parking minimums.
In addition, we can tax land:
It’s a progressive, essentially impossible to evade tax that incentivizes densification and development while disincentivizing real estate speculation. Oh, and it can’t be passed on tenants, both in theory and in practice.
And even a milquetoast LVT – such as in the Australian Capital Territory – can have positive impacts:
[email protected]
[email protected]
Do you live somewhere without land taxes?
Yes, almost nowhere in North America currently has land value taxes, including my city. Rather, most places here have property taxes, which are different in a critical way. This video explains the issue well. But essentially property taxes bundle land values and improvement values (i.e., what’s built on the land). The problem with this is it creates a financial disincentive for improving your land while those who wildly underutilize urban land (e.g., for parking lots in downtown or vacant lots) pay pennies in property taxes. This often makes it profitable for speculators to buy up vacant land, hold it vacant (or at minimal use like a parking lot), and just wait for it to appreciate, then sell or rent out at massive unearned profits. And when a whole bunch of others catch wind of this scheme for free, unearned profits, well they start buying up land, too, further driving up prices.
Land value taxes can stop this as they don’t tax you for your improvements but they tax you significantly more for the land you hold. This means the annual taxes you pay on that vacant lot or that downtown parking lot will be more than your expected annual gains from appreciation. Both because your taxes are higher and because appreciation will be less now that holding that land incurs a not-insignificant tax obligation.
Long story short, property taxes make speculation profitable and incentivize land hoarding, while land value taxes make speculation unprofitable and incentivize denser development.
Ah, I didn’t realize the distinction.
The only thing I’d be concerned about is that if you charge a land tax to everyone as if they’re going to build a mega-walmart on that land, then individuals who would otherwise be able to own land would not be able to because they don’t have institutional money like that.
I don’t really want a world where only institutions and the super-rich can own land because all land is taxed like it might have a mall built on that land.
Land value taxes would actually have (and do actually have!) the opposite effect. First, land is taxed based on its value, much like property taxes are based on the value of the property. This is typically appraised by using fancy statistics. The idea being you don’t tax rural land at anywhere near the same rate (in dollars per acre) as you tax land in Manhattan.
Second is – as the data from the Australian Capital Territory shows – a land value tax makes possessing land an obligation and also reduces upwards speculative pressure on land prices. Thus, land value taxes tend to make land cheaper to purchase. In theory, if you raise land value taxes high enough, you could make land prices approach zero, as the tax obligations start to equal the benefits of owning the land. In effect, such a situation would be functionally equivalent to renting land from the government.
And of course the big benefit of renting vs owning is you don’t have to pay an upfront cost, which means much lower barriers to entry for starting small businesses and startups, and also means you could buy a home without also paying upfront for the land.
Edit:
A good quote by American economist Henry George I think explains it nicely:
After all, possessing land is an asset, hence why we’re willing to spend so much money for it. Even by merely possessing land, you can rent it out to someone else for money. This is called the “rental value” of the land. Henry George was famous for advocating that we tax land to the value of the full rental value of land. At this level of taxation, owning land is equally asset and obligation, so its price would approach zero. Thus, regardless of if you owned land or not, you would be at neither advantage nor disadvantage.
A great socioeconomic equalizer, if you ask me.
It could reduce land speculation, but as you increase the amount of money someone needs just to own land, then fewer and fewer people will be able to own land. Eventually if you raise prices high enough, only the super-rich could afford it because they’re the only ones who can afford to pay the tax. At that point, you’ve re-implemented feudalism, as powerful landlords extract wealth to pay taxes to the king.
As it stands, you need a ton of money just to own land. Roughly speaking, if you think owning a parcel can provide you $1000 of value per year, you might be willing to spend $10k or $20k or more upfront to own it. And last time I checked, people who can afford that much money upfront are disproportionately rich.
But if it’s taxed at $1000 per year, the net benefits to owning the land evaporate, and you won’t be willing to spend money upfront on it. Nor will others, hence the price of land drops towards zero. Neither you nor rich people want to waste money on something that is just as much an obligation as it is an asset.
And that’s the key idea here: to decouple access to land from economic advantage. This is reverse feudalism. In feudalism, it’s all about concentrating control of land to concentrate the benefits of land ownership. With LVT, it’s about taxing away the benefits of land ownership so it’s no longer this precious commodity that is worth hoarding.
Under a “full” LVT, there would be precisely zero economic benefit nor reason to hoard land. You would effectively just rent land from the government if you believed you had a suitable use for it. And renters are statistically poorer, as paying upfront is a massive barrier to entry. Hence why homeowners are statistically richer, because you need money to pay the upfront cost.
Edit:
I’ll add some empirical results from Estonia:
Reducing the upfront cost of land via land value taxes makes land easier to access for the masses, and it makes the peculiar benefits of land more evenly felt. It’s the opposite of feudalism.