Rethinking the Economics of Land and Housing
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Rethinking the Economics of Land and Housing
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Overview
In this accessible but provocative guide to the economics of land and housing, the authors reveal how many of the key challenges facing modern economies - including housing crises, financial instability and growing inequalities - are intimately tied to the land economy. Looking at the ways in which discussions of land have been routinely excluded from both housing policy and economic theory, the authors show that in order to tackle these increasingly pressing issues a major rethink by both politicians and economists is required.
Product Details
| ISBN-13: | 9781350374270 |
|---|---|
| Publisher: | Bloomsbury Academic |
| Publication date: | 04/20/2023 |
| Pages: | 280 |
| Product dimensions: | 5.30(w) x 8.45(h) x 0.65(d) |
About the Author
Toby Lloyd is head of housing development at Shelter, the UK's largest housing charity, where he was previously head of policy. He has worked on housing issues across the public, private and voluntary sectors for over twelve years, advising ministers, mayors, businesses and communities. His proposal for a new Garden City won the runner-up award in the Wolfson Economics Prize 2014.
Laurie Macfarlane is an economist at the New Economics Foundation, working on land and financial reform issues. He was previously head of economic analysis at the Water Industry Commission for Scotland and also spent one year working in the markets and economics division at Ofwat. Laurie has written on land and housing reform for the progressive Scottish think tank Common Weal. He has a first class degree in economics from the University of Strathclyde.
The New Economics Foundation is the only people-powered think tank. It works to build a new economy where people really take control.
Read an Excerpt
Rethinking the Economics of Land and Housing
By Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane
Zed Books Ltd
Copyright © 2017 Josh Ryan-Collins, Toby Lloyd and Laurie MacfarlaneAll rights reserved.
ISBN: 978-1-78699-118-8
CHAPTER 1
Introduction
Buy land – they're not making it anymore.
MARK TWAIN (ATTRIBUTED)
Attention salesmen, sales managers: location, location, location, close to Rogers Park.
1926 REAL ESTATE CLASSIFIED AD IN THE Chicago Tribune, in Safire (2009)
This is a book about land and its role in the economy. By land we don't mean physical earth and rock, we mean locational space. Land plays a central role in the economy but one that is often overlooked and poorly understood. This lack of understanding is a major weakness in much orthodox economic thinking, and helps to explain many of the policy failures and problems that bedevil modern societies. These include the crisis in the affordability of housing (the main use for land in modern economies), rising inequality, financial instability, excessive household debt and falling investment and productivity levels, despite increasing paper wealth.
This book should help the reader understand how these problems came about and provide some clues as to how they might be addressed in the future. The book has two sets of audiences and objectives. Firstly, it is aimed at the interested reader who wishes to better understand some of the challenges facing modern economies and societies. These questions include:
• Why are house prices in advanced economies rising faster than incomes and the growth of the economy? Is it simply a case of building more homes or having fewer people? Why don't politicians or policy makers want or allow house prices to fall?
• Why is landownership so concentrated and wealth inequality growing so fast?
• Is it desirable for society to aspire to home- and landownership as the best route to wealth?
• What is the relationship between the financial system and land? Why have banks begun to lend more for the purchase of existing property and land than to businesses for investment? Why are household debt levels historically so high?
• What is the cause of the large boom and bust cycles in house prices experienced in the UK and other countries over the last forty-five years?
• How does the value of land relate to the technologies of production, the distribution of wealth and economic inequality over time?
• Why isn't land and location taught or seen as important in modern economics or integrated into national accounting?
Secondly, this book is aimed at students and academics in the social sciences, including politics, political economy, law, sociology, geography, urban studies and, perhaps most of all, economics, where the topic of land has almost completely disappeared from most textbooks. To understand land properly, we must take a cross-disciplinary approach – we need a bit of history, a bit of economics and a bit about power and the law.
This book is focused on the macroeconomics and political economy of land – in other words, how it impacts on aggregate or national economic phenomena, such as the distribution of wealth and income, changes in asset prices, flows of credit and stocks of debt, and, for the most part, the national rather than international or local/regional policy and political sphere. A particular goal is to help develop a more coherent analysis of the role of 'economic rent' in modern economies: that is, the excess returns derived from the ownership of a natural (usually scarce) resource. Land, we believe, is the most important source of such rents in advanced economies and also the most neglected. The book is motivated by the failure of mainstream macroeconomics to develop theories adequate to explaining these dynamics. This has been a long-term problem andwe are not the first to tackle it, but it is one that has been brought into particularly sharp definition in the post-financial crisis period since 2007–8.
This book does not examine the economics of cities or urban space more generally, or the role of land in agricultural or development economics settings. These are fields which we felt were already well covered in the existing literatures. The focus of the book is also primarily on the use of land as housing rather than commercial real estate, although the latter is discussed in a number of places. Similar dynamics apply to both, but there are important differences that space has not allowed us to examine.
The economic story of land is global, and much of the evidence and arguments presented in this book are relevant to advanced economies generally. But the way in which land's role in the economy has played out in different places depends largely on the laws, institutions and political history of particular nations, and so varies widely. Rather than attempt to comprehensively cover the world – an endeavour that would have required a book six times the length of this one – we mainly focus on the United Kingdom as our case study. The UK is a large and mature economy, and many aspects of its land economy, legal institutions and financial system have been exported around the world (particularly to Anglo-Saxon, common law countries), making it a useful reference point for more generalised discussion of the issues. But throughout the book we also incorporate examples of the role of land in other advanced countries.
1.1 What is land?
In classical political economy (the predecessor to modern economics), land was understood to be one of the three factors of production, along with capital and labour. Any economic activity requires the combination of all three: a farm obviously requires land to produce food, but so too does a factory to produce goods, or a lawyer's office to provide legal services. Looked at like this, it is clear that land is not simply soil, and its economic uses are not simply agricultural. In fact, land is better understood as space and the occupation of that space over time.
Throughout most of economic history the primary function of land was for agricultural production. But since the birth of modern, capitalist economies other uses have become predominant: first as the site of industrial production, and later as the site of service provision and domestic housing. Today, it is in the housing market that the economic function of land is most visible, as the value of residential property has overtaken the value of land used for other purposes, as the economist Thomas Piketty (2014) makes clear in his recent book Capital in the Twenty-First Century. For this reason, much of the book focuses on housing as the main economic use of land.
Land has several unique features that differentiate it from the other 'factors of production' that form the central focus of the economics discipline: capital and labour. Most obviously land is immobile: you can't move land from one place to another, because land is the place itself. The supply of land is highly inelastic, if not fixed, because you cannot make any more of it (with the small exception of reclamation from the sea). To all intents and purposes, land is eternal (with the small exception of coastal erosion), although climate change looks set to lead to a reduction in its habitable surface. Most importantly, land is essential for all economic activity to take place – and indeed for life itself.
These unique features determine much of the special economic functions of land. Notably, they are features that do not fit well into mainstream (neoclassical) economic models where the supply of commodities, labour and capital can easily adjust according to the demand for them and find an equilibrium price and quantity (see Box 1.1). But rather than adjust their models for this reality, economics has neglected land or conflated it with other factors of production, most notably 'capital'. This failure to distinguish between land and 'capital' as factors in the production process, in notions of 'wealth' and in national accounting is a major conceptual error in the evolution of economic theory that we explore in this book (Chapters 3 and 5 in particular).
Throughout this book we treat land as the physical space within which economic activity takes place.
1.2 What is the value of land?
The economic value of any piece of land initially stems from the uses it can be put to – as a field, a factory, an office, a shop or a home. The economic value of these uses will vary not only with the natural features of the land, but with their geographic relationship to the rest of the economy. A fertile field is obviously more valuable than a desert, all else being equal, but fertile ground miles from people to farm, roads to carry or markets to consume its produce is less valuable than one near a city with good transport connections. Estate agents like to say that 'location, location, location' is the most important factor in selling a home, because everything else can be changed. What they are referring to is the fundamental locational value of the land itself. This can be seen in the often huge discrepancy between the 'replacement cost' of a home calculated for insurance purposes and the actual market price it commands: the difference between the two is essentially the value of the land in that particular place.
Land values in any particular location reflect the level of wider economic activity in that area. The price of a home in a thriving city can be many times that of an identical home in a remote, depressed region, because of the access to economic opportunities that living in the city brings. Most obviously, investment in infrastructure increases the value of land, by increasing the range and quality of uses it can be put to, and the relative advantages of well-served locations over other places. New transport links, or being in the catchment area of a good school, dramatically affect the market value of homes in that location, because they boost the value of the land underneath those homes.
But the value of land is not only determined by its current use value. Because land is permanent, controlling land is also a means of securing the economic value that holding it will provide in the future. In other words, land is an asset as well as the provider of consumption goods (food, shelter), and land prices will reflectpeople's expectations of future economic activity. The permanence and inherent scarcity of land make it a good asset for the storing of value (assuming no major changes to planning regulations). Most capital assets depreciate in value over time due to natural wear and tear but land tends to appreciate. This means people are often keen to convert other forms of wealth into land, including money which, although much more liquid, can lose value rapidly under conditions of consumer or asset price inflation. This dual function makes land challenging to neatly fit into economic theory since at any point in time land can be being used for different purposes.
For similar reasons, land is also an excellent asset to act as security (or 'collateral') for extending credit and finance, the topic of Chapter 5. For the first few decades after the Second World War, restrictions were placed on lending against property because of concerns about excessive real estate bubbles. However, in the 1970s and 1980s the liberalisation of credit markets led banks to radically change their primary role in modern societies, switching from lending mainly to businesses for investment to lending to households for home purchase, taking land as collateral.
The regulatory constraints on the practice of lending against property assets are therefore a key determinant of the workings of the market in land and landed property and the macroeconomy more generally (Aron et al., 2012). Today the relative advantages that buy-to-let (BTL) borrowers have over first-time buyers in securing access to mortgage credit has helped to drive the increase in landlords' share of the total housing stock (Kingman, 2013). International regulatory moves since the 1970s have also incentivised banks to favour property-related lending over other types of loans and so contributed to keeping property and land prices up.
While there is a strong theoretical case for allowing land to be used as a form of collateral from an economic developmentperspective (De Soto, 2000), there is also strong evidence that rapid rises in real estate credit increase financial fragility and are strong predictors of financial crises and long- lasting recessions. More generally, a number of economists now argue that capitalist economies are characterized by a land–credit 'cycle', which may be longer and deeper that the standard economics textbook 'business cycle' (Aikman et al., 2014; Borio, 2014).
Figure 1.1 shows how house and land prices have developed over time in the UK over the last sixty years. We can see that since the 1960s land prices have become highly volatile, with three huge boom–bust cycles, corresponding to expansions in bank credit in the 1970s, late 1980s and 2000s. Discounting inflation, house prices have gone up five times since the end of the Second World War. But the price of the land needed to put houses on has increased in real terms by fifteen times over the same period. Research suggests that house price volatility is primarily driven by land values – which is to be expected, as the price of construction (labour and building materials) is subject to more standard and slow moving economy-wide factors. Importantly, land values tend to rise rapidly ahead of house price booms, showing how land markets present good opportunities for speculative investment to extract value.
As noted by the American sociologist Thorsten Veblen (1899), landed property can also be seen as a 'positional good' which people use to demonstrate their social status. People will therefore be prepared to pay more for desirable locations than can be justified purely by rational economic calculations. As economies develop and become more informationally intensive and the costs of many goods and services – cars, computers, mobile phones – fall, locationally desirable land and property will be likely to eat up a larger proportion of people's incomes (Turner, 2015a, p. 70).
Relatedly, physical space is also highly desired and not subject to diminishing returns – as people get richer, they want more space. Estimates suggests that a 10% increase in incomes leads people to spend about 20% more on space in houses and gardens (Cheshire and Sheppard, 1998). In the economics jargon, land has a 'high income-elasticity of demand' – people will stretch their incomes to consume it.
This is why the rise of communications technology has not meant 'the end of distance' as some predicted, but has in fact driven the economic pre-eminence of a few cities that are best connected to the global economy and offer the best amenities for the knowledge workers and entrepreneurs of the digital economy (Florida, 2004;Thrift, 1996). The scarcity of these locations has fed a long boom in the value of land in those cities (De Groot et al., 2015).
The technological transformations of recent decades may not have abolished the significance of land in the economy, but they have accelerated a shift in the relative economic importance of different land uses, which was already underway. As Piketty's (2014) data demonstrates, the proportion of the total stock of wealth represented by housing has risen rapidly since the mid- twentieth century, while the value of agricultural land has dwindled to almost nothing as a share of GDP (see Chapter 6).
Piketty's data also shows that for around 270 years, in the UK and France residential property wealth varied between 60% and 180% of GDP (Figure 1.2). Since the 1980s, however, residential property values have exploded and are now over 300% of GDP in both countries. In the US, the expansion has been less dramatic but residential property values have still increased threefold since the beginning of the twentieth century as a percentage of GDP. Clearly,a fundamental shift has occurred in these economies, as housing has replaced farming as the primary economic use of land.
All of these factors complicate any assessment of the value of land, but in general they combine to make land a highly favoured investment class, and a perfect asset for speculation – provided, that is, it can be owned at all.
1.3 Landownership and economic rent
The main institution which has mediated the interaction between land and the economy in modern societies is via property ownership, the subject of Chapter 2. The idea of property ownership seems simple at first: you own a property and have exclusive rights to occupy that piece of land for a defined period of time (or the landowner grants you such rights as a tenant). In fact there are multiple forms of individual and collective forms of ownership possible, with modern exclusive individual homeownership a relatively recent phenomenon.
(Continues...)
Excerpted from Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane. Copyright © 2017 Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane. Excerpted by permission of Zed Books Ltd.
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Table of Contents
Foreword by John Muellbauer1. Introduction
2. Land Ownership and Property
3. The Missing Factor: Land in Production and Distribution
4. Land for Housing: Land Economics in the Modern Era
5. The Financialisation of Land and Housing
6. Land, Wealth and Inequality
7. Putting Land Back into Economics and Policy