There is a longstanding view, associated with Henry George, that governments should tax the value of land.
Georgism has some ins and outs, but the basic idea is that, unlike valuable labor or valuable capital investments, there’s nothing you can really do to make land valuable. It’s just there thanks to God or Mother Nature or whoever designed the simulation that we’re all living in. So if a patch of land is valuable because its soil is really fertile or it’s close to the beach or has a beautiful view, then taxing the value of the land doesn’t create any bad incentives. It’s just sitting there.
This can be overstated in its most extreme forms, but it’s largely correct. My policy advice for Maine, for example, partook of Georgist ideas.
But there is a big political economy problem with Georgism. The idea is to redistribute resources from landowners to non-landowners, but landowners are a majority of the American population. And since landowners are older and richer and less mobile on average than non-landowners, they are an even bigger share of the electorate, punching above their weight in terms of political influence. So while I think the Georgist idea is correct, there are probably lots of situations in which it’s a nonstarter.
Noah Smith tries to think through some viable options, but I think in most cases the right path forward is the related — but distinct — idea of YIMBYism.
Critics often level the exact same critique at YIMBYism that I leveled at Georgism: YIMBYism attempts to reduce the cost of housing, which is a good idea, but since most people own homes they will oppose efforts to make housing cheaper and the whole thing is impossible. But recall that the reason taxing land value is hard is that most people own land, and they don’t want the land to get cheaper. But YIMBYism does not seek to reduce the value of land; it seeks to reduce the market price of housing. And while the thing people say is “I’m a homeowner,” the commodity they are actually invested in is land.
Homes do not appreciate in value
My family owns a small parcel of land in Washington, D.C.
Located on that land is a home, a small backyard, and a small garage. The garage has a leak due to some deteriorated masonry that needs to be repaired. The house itself also has a leak due to some deteriorated masonry that needs to be repaired. It’s taken so long to get a permit from the Department of Transportation to have a mason set up in the alley adjoining the house that the leak in the masonry has contributed to damage in the adjoining drywall, which now also needs to be repaired.
And this is not by any means the first time we’ve needed something repaired in our house. Over the past few years we’ve replaced a fuse, had some HVAC ductwork redone, had a prior failed effort to address the leak, replaced some very old and extremely drafty windows, and addressed several minor plumbing issues.
The underlying problem here is that our house is 130 years old, and houses are large physical objects whose functional properties degrade over time. They are full of appliances, and every few years one or another of the appliances is at risk of failure. They contain tons of moving parts — hinges, handles, knobs — that can break. They are exposed to the elements.
Buying a house is like buying a boat: it’s this big old thing that only costs more and more money over time. Or to be precise, it’s like buying an RV. Here on RVTrader.com, the 2020 Thor Motor Coach ACE is cheaper than the 2022 Thor Motor Coach ACE because it’s older. Older stuff is cheaper.
The big difference between a house and an RV of course is the house doesn’t move. You could, if you wanted to, buy a vacant parcel of land and then park your RV there. Here’s a good Bangor Daily News story about how the price of empty land in Maine soared during the pandemic, both because of people looking to get out of the city and because low interest rates made it possible for more people to buy.
This is called the Case-Shiller U.S. National Home Price Index, but the upward trajectory is actually the price of the land, not the price of the houses parked on the land.
This habit of talking about buying a home, homeownership, home prices, etc is all very entrenched, and it’s hard to get it out of your head.
But they really are different things. Imagine if you saw a weird Zillow listing that had two separate items:
A house, where the owner of the house would have full rights to everything but would need to pay a monthly rent to the landowner.
A parcel of land, with a house sitting on it, where the landowner wouldn’t be able to use it or do anything but would be entitled to collect a monthly rent.
Well, the former is something you might buy if you needed a place to live, but would clearly be a terrible investment — all the risk is on the downside.
The latter, by contrast, could be a potentially lucrative investment. But it’s completely useless from the standpoint of you wanting to have someplace to sleep at night. It would be like trying to use your shares of Tesla stock as a car.
YIMBY is good for landowners
Here is Bruce Blakeman, the Republican Party county executive of Nassau County in the New York suburbs denouncing a proposal from Kathy Hochul to allow landowners to build accessory dwelling units.
In virtually any other context, Republicans would see that imposing strict regulations on economic activity can be costly and harmful. But instead, he’s running with some identity politics appeal about how this idea would “destroy suburbia.”
But just think about this on a practical level.
As I said before, we own a small garage in our expensive neighborhood. It’s useful, it’s nice to have, and we like it. That said, converting it into a rental apartment could potentially earn us a lot of money. And much as garages are useful, money is also useful. Giving me the option to choose between using that space as a garage and using it as a rental apartment would be good for me.
In our neighborhood, though, not only is it forbidden to convert your parking area into an ADU, but you can’t even make your house bigger. Your house can occupy, at most, 65 percent of the lot and must include off-street parking. I have no desire to expand the footprint of my home. But other people in the neighborhood probably do. Allowing them to make their houses bigger would make them better off. Beyond that, even if I would never personally take advantage of the right to expand the size of my house, merely having the right to do so would increase the value of the home in the event that I sold it.
The same is true for more dramatic forms of upzoning. In loose rhetoric, people talk about “developers” knocking down small buildings and replacing them with tall ones. But of course developers don’t sneak in overnight and dynamite people’s houses — they buy them. If you were allowed to demolish Logan Circle rowhouses and replace them with structures that are four times as tall, it probably wouldn’t happen all that much in practice since they’re so skinny. To reasonably build tall buildings you’d need to acquire two or three adjacent properties which would be a logistical hassle. But it wouldn’t never happen. And the option to do it would plainly increase the value of the land.
More broadly, one of the main issues in urban real estate development is that the permitting process is so opaque and complicated.
Little kids know what a construction worker is and about the roles of the building trades in creating new homes. Later, you might learn about the idea of an engineer or an architect who designs a building. The concept of the “developer” is much more abstract, because a key part of the developer’s value-add is that he navigates the permitting process. Your land might be very valuable in the sense that there is a high demand to live in it. But to unlock that value, you’d need to actually build something there, and only a developer can make that happen. To the extent that you allow by-right construction with regulation aimed at safety (which can be addressed by an engineer) rather than a discretionary permitting process, economic value drifts away from the developer and toward the landowner.
The logic of NIMBYism
So are NIMBYs all making some giant mistake and harming their own interests?
Not really. When I had to go in front of the Advisory Neighborhood Commission to get them to recommend that the Historic Preservation Board approve my rooftop solar proposal, I was scheduled to go at the end of the meeting, so I got to see the other business they conducted.
One issue was a developer who had plans for a small project that he wanted approved. The ANC didn’t like some kind of window bump-out that was in his plans and asked him to slightly shrink his floor plan as a condition of approval. They asked another guy to shrink the proposed yard on something he was doing in order to generate an additional off-street parking space. They had me add a little design complication to the solar panels to ensure they wouldn’t be visible from the alley on the side of my house.
None of these are irrational requests once you accept the premise that all projects in the neighborhood should be assessed by a board of hyper-local elected officials who scrutinize individual projects from the standpoint of “what do the neighbors want me to do?”
Making me add the extra mitigation accomplished very little to improve the lives of my neighbors, but it cost them $0. And while it would be good for me, a homeowner, if I were allowed to convert my garage into an ADU, allowing me this huge financial windfall would impose the minor cost of extra traffic and parking scarcity on my neighbors. For them to block me from doing it, by contrast, costs them nothing.
Once you create the presumption that very little should be allowed by right and the discretionary process should involve considering the interests of the local stakeholders on a case-by-case business, the NIMBY perspective is the correct one. It’s also true that not everything in land use is about housing. A functional city needs things like a garbage dump, a parking lot for buses, a place for indigent people to get drug treatment, and other facilities most people would prefer not to live adjacent to. Institutions of community empowerment help people protect themselves against these locally undesirable land uses. But once they exist, it’s understandable that the institutions themselves would push to increase the scope of their activities, including the ability to use them in an exclusionary way.
But this is why state preemption is a promising strategy. It’s bad for me if my neighbor builds an ADU. And it’s bad for my neighbor if I build an ADU. But a general rule saying “people can build ADUs” is good for landowners throughout the city. Debating this on the level of the city council — or the state legislature, in New York’s case — changes the question that’s being asked.
Wait, is building bad for renters?
Here’s a cartoon that ran recently in the Seattle Times offering the opposite viewpoint, that allowing more construction will do nothing for affordability.
But let’s try to sketch out what’s happening here.
In the first panel, you have one modest home located on a very expensive parcel of land.
In the next panel, the land is split three ways but the market value of the units is still very high.
Why would you pay $850,000 for a condo in a neighborhood where single-family homes sell for $850,000? It would have to be that the condo units are much nicer than the SFHs in some way. All else being equal, most people prefer a house with a yard and no noise from the upstairs neighbors. But you could overcome this if the units were larger than the SFHs or they had really great amenities. Either way, you’ve not only added two net homes to the city, but you’ve increased the average quality of the housing stock. That’s housing abundance.
And housing abundance reduces rent. We’ve now had enough studies on this (Evan Mast, Kate Pennington, Xiaodi Li, Mast this time with Brian Asquith and Davin Reed) that I’m getting worried that new empirical studies will be considered uninteresting and won’t get published or done. Obviously, Seattle allowing one single-family home to be replaced by condos won’t end homeless, but the evidence is overwhelming that homelessness is more common in places where housing is scarcer.
The key to all of this is that housing and land are different — albeit related — things.
As the cartoonist illustrates, allowing the new construction is good for the developer.
Because it’s good for the developer, it’s also good for the former owner of the SFH — and in general, developers’ ability to make a profit by buying SFHs increases the value of SFHs because it increases the value of the land that they’re parked on. But it also creates a more abundant housing supply and reduces housing costs for buyers of housing. As is often the case, allowing a freer market is simply a prosperity-increasing, positive-sum change. The current institutional framework is bad and we should change to a better one.
Risk and change
Change is hard, both because of general inertia and also because people are risk-averse and loss-averse.
After all, even if you believe that upzoning is a positive-sum win-win policy change, it would require some heroic assumptions to get the result that it’s Pareto optimal and makes literally everyone better off. It is good, on average, for both renters and homeowners to upzone a city. But some individuals may end up worse off. And it’s hard to predict exactly who that will be, especially because people differ in their tastes and preferences.
This is made even more difficult politically by the fact that it’s easy to mobilize people’s identities alongside their concrete fears. Earlier I quoted Bruce Blakeman allowing his suburbanist identity politics to override his normal Republican Party appreciation of free markets. On the flip side, in many central cities, you see leftists allowing their suspicion of markets to override their basic appreciation of density. That’s why I increasingly try to talk about this issue in a restrained and balanced way. A lot of YIMBY housing commentary comes from young renters who are trying to impress leftist friends, and that’s fine. But as a middle-aged homeowner, I want to clarify that there is an upside for middle-aged homeowners too.
But beyond rhetoric, we should aim for policy approaches that create certainty and clear upside for people.
Street parking, for example, is a genuine zero-sum issue. To park on residential side streets in D.C. you need a Residential Parking Permit, which is available from the city for a pretty small fee. A standard technocratic critique of the RPP system is that the permits are underpriced. But I tend to think the opposite. We should stop issuing new RPPs, but give the existing RPP-holders a property right in their permit. In other words, if you have an RPP you can keep parking on the street for free forever. If you’re new to town, no RPP for you. But incumbents should be able to sell their RPP to a newcomer if they want to. That way a self-interested reason to block new housing (parking scarcity) becomes a reason to favor it (more demand for your RPP).