STRONG TOWNS
Who Benefits From Lower Housing Prices?
Charles Marohn April 9, 2019
Excerpts:
I’m being brutally honest (and a little vulnerable) here in order to make a difficult point about another public issue that can quickly become personal: affordable housing. Because here’s another brutal truth: in our cities today, nobody in a position to seriously impact the affordability of housing ever benefits from housing prices becoming affordable. In fact, the opposite holds true: most every individual or organization in a position to lower housing prices would be harmed by such a result.
The fundamental insight behind [this slide], I think, is important. Governments rely on continually rising housing prices, or else things can go really bad really quickly (see the financial crisis of 2008). Existing homeowners would much prefer to have their housing prices go up than have them stagnate or fall. People making loans on homes, building homes, developing property, or working within the real estate market have many of their mistakes forgiven by appreciating property values. Those who invest—including pension funds and other institutional money—benefit not only from the appreciation of real estate, but also from the overall wealth effect that rising home prices provide.
So a policy approach that lowers home prices is going to run into a lot of structural resistance. And that’s the core cognitive dissonance in our affordable housing conversation: we want housing to somehow become more affordable without prices actually going down. Stated another way, we want people to somehow be able to afford housing while housing itself remains largely unaffordable.
Only die-hard YIMBY movements have been really honest about this disconnect. That’s because the foundation of their thinking is a near-religious belief in the law of supply and demand—and forget the messiness of human irrationality. If supply and demand is your gospel, it makes sense to seek to lower prices by dramatically increasing supply, and that’s what market-focused urbanists do. That would do the trick, for sure, but whether it would actually be the kind of stable and prosperous world they envision is another question.
As with many housing issues, I don’t have a clear three-step plan to make everything work for everyone. When it comes down to it, our vision for our personal happiness is often at odds with our theoretical utopia. Put another way, individually, we have a vested interest in one approach (rising prices and growth), but collectively, we express an interest in the opposite (broader affordability and housing stability).
If we first make that acknowledgement, we can start to discuss a transition between a housing market dominated by our current distorted craziness and one that is more responsive to human needs.
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Comment:
The supply-demand view may be a valid way of looking at short term spikes in housing prices, but it is not the only way of addressing the housing affordability problem. The lack of affordability has been a long term trend since the late 1970’s, and it is best described as the growing gap between rapidly rising housing costs and moderately rising household incomes.
By the 1990s, the information / service economy produced a new generation of explosive and concentrated wealth. Under the rapid pursuit of the American Dream, the housing market had been commodified – transformed from a supplier of shelter to a source of economic gain through equity accumulation. Those families without the capital resources to jump onto the equity bandwagon with a first-time home purchase are often left behind as the affordability gap widens.
The for-profit housing sector competes for the higher-end housing market. Increasing the supply of market rate housing will not be effective in bringing filtered-down units into the affordability range, because additional supply alone cannot keep up with rising prices in existing housing stock. As Daniel Herriges asserts, the traditional filtering process by which housing units move into a different price tier has reversed from a downward to upward spiral. It is the location of existing housing units, not the structure itself that is the primary driver. For new units it is both.
Real estate industry historic records show a distinct trend towards larger single family homes, which itself generates consumer preferences for more living space. By 2000, new homes were 40 percent larger than they were in 1970 when the stage was being set for the commodification of housing.
By now, existing and new housing prices are so high that big bank lenders are finding ways to leverage higher profits by converting more home value into long term mortgage debt.
Rising land cost is the major factor driving up most housing prices
If indeed land value inflation is the principal cause of rising home prices, then it must be dealt with directly, through financial incentives. Patrick Condon, citing the housing crisis in British Columbia, proposes the imposition of affordability requirements as a way to drive down the upward filtering process. Land prices have jumped by as much as 1,000 percent in recent years, and now constitute up to two thirds of total development costs in the City of Vancouver. Requiring the inclusion of below market rate units in a project will put a downward pressure on the price developers can pay for land.
The present property tax system is a good example of how perverse financial incentives lead to unrestrained land price inflation, disinvestment, and the over-consumption of raw land. Under the present system where buildings and land are taxed at the same rate, owners have no incentive to invest in property improvements or more compact development, because doing so will result in higher taxes. Holding onto underutilized lots or letting buildings deteriorate results in lower taxes.
Inherent in the equal rate method of property taxation is a built-in disincentive to utilize land more efficiently or to place it on the market at reasonable prices.
If the tax burden were shifted from building value onto land value (accomplished through differential tax rates), the property tax could put a damper on land price inflation. A land-based tax system would discourage land speculation and over time bring land prices into the range of affordability.
A change from the conventional property tax to a land value tax (LVT) involves taxing land values at a higher rate than improvement values, and applies this split rate to all parcels within the adopting jurisdiction. The land tax is conceived to produce desirable owner incentives – to invest in substantial property improvements, not to speculate on sites and raise the costs for later occupants. The premise is simple: tax buildings less and the supply expands; tax land more and it is conserved. Housing affordability could be enhanced through greater site utilization or higher residential densities, because of the lower per unit development costs of multifamily structures.
We do not suggest that the LVT will change every landowner’s investment decision through a tax shift, but the effects in the aggregate are significant.
Tom Gihring, Research Director
Common Ground – OR/WA
