History lesson: Housing problems stem from the distribution of property ownership

A guest post on how land distribution and access are central to questions about equality and housing

Cameron here.

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By: Anonymous

Would you consider the following situation an indicator of policy success or failure?

• Most (at least 70%) of households outright own their home. No mortgage, no debt, no lease to pay.

• Fewer than 5% of households rent their place at a full market price.

The above statistics aren't some sort of fantasy or hypothetical scenario; there are a number of OECD countries that have this situation today.

But for now, let’s consider whether a high rate of debt-free homeownership in itself is a desirable outcome. Most readers are likely to answer yes, and indeed most likely either own their own home or aspire to own their own home. Likewise, most governments, regardless of who is in power, seem to strongly agree too.

There are a few non-economic reasons why widespread homeownership may seem like a good idea to most politicians, ranging from socio-political (perception of greater stability and sense of community) to it being obviously popular among voters.

But ultimately, it all boils down to the unique nature of land in the economy.

Property rights to land and their economic role

Access to land isn't just essential for life, but the land question has always been and always will be at the heart of the problems of inequality and poverty. Regardless of technological progress, there will always be a land/property problem because the demand for land will always increase with economic growth, and the supply will always be restricted.

This is obvious to everyone, including those with little knowledge of or interest in economics.

Economic growth and overall development of any community is everywhere and always accompanied by a steep increase in rents and land values (which reflect not just the rental potential but also expectations of future rise). This is in stark contrast to products of labour and capital goods that tend to become cheaper (particularly relative to quality) with technological and economic progress.

This fact means that those who own land find themselves in a position where they can demand "gifts" from people. If you can, grab and hold the best land. Then you just sit back and wait for others to give you the gifts of economic surpluses that crystallise as capital gains in your land. It is a slow process, and the gains are not always liquid, but every investment around your land — railways, factories, houses, schools, hospitals — is a capital gift to you. These gifts are not lottery wins; the owners of real estate in major metro areas are taking no risk in owning it over the long term, unlike, say, buying shares of a company.

Twenty or thirty years in the future, you liquidate the capital by selling the land. You have added no value, taken no risk, or capitalised any company that employed anyone; you have simply extracted wealth from society.

No force was involved in the same way no force is involved by a con artist; you have simply spotted a general ignorance across society of a mechanism for transferring wealth from poor to rich. The working poor tenant pays their fair share in bridge tolls, but the landowners around the bridge have their tolls rebated to them as capital gains in their land when the bridge is built.

Even without understanding these dynamics fully, most people and politicians instinctively feel that preventing poverty and massive inequality requires some sort of strategy aimed at making as many people land/property owners as possible.

There is nothing new about this.

Land problems lead to political revolutions

Prior to 20th-century urbanisation, most people in Western societies lived in the countryside, and the key issue for many was the unequal distribution of land ownership in rural areas.

This problem was at the heart of countless revolutions, conflicts, mass emigration from Europe, and political movements in the colonies (once their land got bought up). The hunger for rural land was the defining problem of pre-urbanised societies, much like the hunger for urban land is the fundamental policy issue in current societies.

Land pressures were sometimes alleviated by technological innovation (e.g., fertilisers and new agricultural techniques) that allowed people to produce more with less land. The same is true for urban land, with the invention of cars and elevators allowing people to use land more effectively.

However, these effects are short-lived, and the extent to which they can alleviate inequality depends on the ability of the landless to timely acquire ownership of the previously cheap or low-productivity land. In most cases, technological innovation cannot alter the distribution of land and hence ultimately benefits landowners more than tenants. Even if tenants can enjoy higher standards of living, they also must pay more dearly for the right to enjoy the fruits of labour, and landowners continue to reap what they never sowed, to paraphrase Adam Smith.

As the trope goes, capitalism did pull millions of people out of poverty. What this trope ignores is that it was degenerate feudalism and land monopoly that put them in poverty in the first place.

Historically, governments at some point realised that the land problem wouldn't resolve itself or be resolved by market forces and technology. Consequently, most countries, particularly those without easy outlets for mass emigration, experienced some type of land reform, either in the form of compulsory land redistribution (with or without compensation) from existing owners, or governments distributing newly conquered or acquired land to landless masses.

While there have been many examples of rather spectacular failures of land reforms to alleviate poverty or address inequality (particularly where they amounted merely to replacing a productive owner-occupier with a new, politically connected, land baron and his allies), in other cases they did achieve their goals. Success happened where productive users of land were given the opportunity to own it directly and/or where the cost of owning land was significantly increased (e.g., via land taxes, such as in late 19th-century New Zealand), making passive, particularly absentee, ownership less attractive, especially for those who held it idle (or engaged in "land banking," to use a modern term).

While history has proven that it is certainly possible to make the land problem worse by attempting to reform it, it's also a reminder that ultimately the land issue is a problem of distribution, not production. As such, the challenge is to find the best method of distribution (ideally of the value of land rather than its physical form), not to come up with ways to subsidise tenants.

Land problems persist today

The curious thing that took place in the 20th century is that the rise of urbanised societies created an illusion that land problems were a thing of the past, as the new masses no longer seemed to rely on physical land to earn a living.

However, this is an illusion.

Indeed, with the rise of the cities, land and location (its inherent feature) have become more important than ever, as with ever more minute specialisation, the need for particular locations and the benefits of close associations of businesses and individuals became greater than ever. Consequently, the ability to remain close to the immense opportunities presented by urban centres became akin to the ability to access fertile fields and lush meadows. And just like peasants needed to pay their landlord dearly to work the fields, modern-day workers need to pay their landlords dearly to be able to access their opportunities for employment, usually working for a business that itself relies on goodwill (bought with far more money per square inch than any pre-industrial magnate could hope to get) of the urban landlord.

Yet, our debates on inequality, poverty, and housing rarely focus directly so much on land. Instead, they focus on attempting to fix the problem by either trying to cram more people onto a landlord's plot, with the hope that landlords see the opportunity for greater profit and choose to build up and offer more people the ability to afford good locations. These solutions can perhaps improve the quality of housing and productivity in specific areas, but just like better farming techniques or tools could improve yields, they always benefited the landowners more than they benefited the tenants, and the question of fundamental inequality and land hunger remained unaddressed.

Take this passage from a 1958 article describing the success of the Japanese land reform:

The land reform was a success in large part because it dealt with what had long been recognised as a "problem" by the Japanese themselves, a problem which successive Japanese governments had tackled with good intentions, but, in deference to the vested interests of landlords, never with determination. That problem was essentially one of poverty. In pre-war Japan, nearly half of the cultivated area was farmed by tenants. Only a third of the nation's farmers owned all the land they farmed. About a quarter rented nearly all their land. The rest owned some of the tiny plots into which a typical scattered holding was divided and rented the rest. This in itself did not constitute a problem, but the concurrence of two other factors did.

The first was that each farm family's holding (whether of rented or owned land) was never large in the first place; the national average was some two and a half acres. The second was that the pressure of population on the land and the consequent competition for tenancy opportunities kept rents at a very high level: for rice land, the most highly prized and productive land, average rents represented nearly half of the gross value of the annual yield. Thus, even in years of high yields and good prices, the burden of rents kept a large proportion of the farming population not much above subsistence level. As such, the "tenancy problem" was (...) one component in the general "problem of agrarian distress.

One could easily apply the same description to the plight of urban tenants.

Perhaps subconsciously, governments acknowledge that one logical solution is to broaden urban land ownership (even if it is in the form of a small percentage of a plot underneath a large block of apartments). However, instead of attempting direct re-distribution of physical land or even indirect re-distribution of rights to enjoy its value (e.g., via land value taxes to be used to fund a citizens' dividend), governments have instead relied on incentivising banks to direct the bulk of new credit creation towards mortgages, especially for "first home buyers".

In a sense, this represents an attempt to re-distribute land with generous compensation for current holders and done at the expense of the landless buyers.

Though, to be fair, the buyers themselves get a fairly good deal out of the scheme, considering that in the long run, they get much of the expense refunded in the form of capital gains, particularly where the government also invests in public infrastructure. For those who can't qualify for a mortgage (increasingly because the initial deposit size is simply too large for any family to save for without additional government support), the government offers either some form of rent subsidy (which should be seen more as a landlord subsidy) or various forms of social housing, which effectively allows people to live rent-free or with minimal rent payments on otherwise valuable land.

In rarer cases, governments ban landlords from increasing rents above a certain level, which in itself is a form of land rent socialisation.

In any case, all of these policies dance around but rarely address head-on the fundamental issue at hand here: unequal access to land is the main driver of unmerited inequality and involuntary poverty. Occasionally, historically, governments in Western countries took bolder action, for example, the Australian government granting land directly to returned service personnel after both major 20th-century wars. But in normal times, governments tend to apply more complex quasi-solutions and hope for the best. Nothing even remotely close in ambition and scope to rural land reform has ever been considered in any of the Anglosphere economies.

The result of it all has been, at best, mixed. While every serious politician would always publicly agree they support broad homeownership, ideally debt-free, despite all the policies, subsidies, and incentives, most people do not own their homes debt-free. In Australia, despite decades of policies aimed at broadening homeownership, just 31% of households own their homes debt-free. Another 32% own their home with a mortgage. 32% of households rent their homes at market rates from private landlords.

Poland’s land redistribution

This brings us back to the original statistic presented at the start of this post.

According to OECD data, over 70% of Polish households own their own homes outright. Just 12% own their homes with a mortgage and fewer than 5% of households rent at market rates. The remaining households live in publicly-owned housing with rent below market rates.

How did this happen?

This situation is the paradoxical outcome of 50 years of communism. It is paradoxical as most people might find it surprising that communism would produce a far greater rate of private homeownership than 50 years of Australian capitalism. However, it is not surprising when one goes back to understanding that, unlike actual capital, land isn't a product of anyone's labour effort or any business entrepreneurship. It simply exists, and as such, land tenure dynamics always and everywhere depend on political, not economic forces. To put it simply, while the quality and supply of houses themselves is a function of economic forces (as their production and maintenance require careful usage and management of scarce resources), land ownership patterns simply reflect political decisions concerning property rights and the responsibilities of those who enjoy them.

One thing is clear, communism was an utter economic failure. Setting aside the gross violations of human rights, lack of accountability, and injustice, it was simply doomed to fail due to fundamentally flawed assumptions about society and the ability of central planners to allocate resources efficiently. Communist central planners failed to understand or even acknowledge the dynamic nature of society, the vast knowledge and calculation problems, and the myriad unintended consequences of seemingly simple and obvious solutions.

It’s obvious that communist countries lagged behind market economies when it came to the production and supply of virtually any goods and services, including houses themselves. Consumer goods were mostly of questionable quality and design if they were available at all. In the absence of real prices, most goods were distributed via rationing, and much of the rationing followed political considerations, with those close to the party receiving a better share of the meagre outputs than average, and those considered to be of politically suspect background receiving even less.

And yet, the legacy of widespread private land ownership (or at least private exclusive usage) can be explained by the fact that, unlike most market economies, communist Poland undertook both rural and urban land reforms.

Following the mass destruction of World War II, border changes, and the expulsion of the German population, the government nationalised much of the rural and urban land in the country. In theory, at least when it came to politically approved populations, in many cases just the land, not the surviving buildings, and, at least in theory, with some form of monetary compensation. But unlike in some other communist countries, much of the rural land was then re-distributed to former tenants or refugees/internally displaced persons. While some estates became state-owned farms, most rural land in Poland landed in private hands. When it came to urban lands, there were a mix of private single-family homes and (state-subsidised and tightly controlled) housing co-operatives built on publicly owned land.

As with any other goods made by communist planners, the quality of the actual houses was poor. This was partly an ideological choice (e.g., any aesthetic considerations were deliberately set aside based on the argument that spending money on making things beautiful meant not spending it on producing more flats, which was seen as a bourgeois betrayal of the working people), but mostly a reflection of the inherent incompetence and lack of accountability of the communist system.

In specific prestige areas where communists wanted to build beautifully for propaganda purposes, they did so, as you can see in the photo of the entirely rebuilt Warsaw Old Town (none of the buildings in this photograph survived World War II; they were all rebuilt by communist authorities).

Despite the vast inefficiencies and absurdities of central planning, the fact that land ownership became more widely distributed or land was owned by the government (as opposed to private, often absentee landlords) meant a dramatic improvement in the housing situation in comparison to the pre-war situation.  

In pre-war Warsaw, with a population exceeding 1.5 million, the housing crisis reached catastrophic levels. The 1931 census revealed that a staggering 60% of occupied dwellings were severely overcrowded, defined as at least two or more people per room. A quarter of the inhabitants in pre-war Warsaw lived with strangers, a fact that stands out in contemporary Poland, where cohabiting with unknown adults is rare. Rents were exorbitant, with the average cost of a room ranging from 60-80 PLN per month, compared to the average monthly salary of an unskilled worker at 80-100 PLN and a skilled worker's earnings of 120-150 PLN. This disparity in income and housing costs contributed to the overcrowding issue. Furthermore, land and housing ownership in the city was highly unequal, with approximately 10,000 individuals owning 90% of Warsaw's land.

Following World War II, the housing landscape in Poland underwent significant changes. The state took on the responsibility of constructing the majority of apartments and townhouses, with private developers playing a minimal role. Although the state provided loans for building materials and construction costs for private single-family homes, most new housing consisted of the archetypal grey blocks of apartments built by state-led housing cooperatives. The quality of housing was generally poor, and the allocation of units was often influenced by political connections. However, by 1989, nearly all Polish households had exclusive use rights to a housing unit, either as homeowners or, in most cases, members of housing co-operatives. While not freeholders, these cooperative members enjoyed secure and exclusive (though not unconditional) use rights over their homes, and benefited form of rent control and land rent redistribution, as the cooperative fees they paid monthly covered the costs of building maintenance, not the land values underneath it.

The post-communist government's embrace of free-market reform and the belief in private property as a panacea led to mass conversions of cooperative memberships into freehold ownership for nominal fees (a tiny fraction of the real market value of the units). To some observers, this amounted the largest wealth transfer in Poland's history. To others, this move contributed to the exceptionally high rate of outright home ownership, particularly when compared to countries like Australia and New Zealand.

The greatest hidden truth of our times is that landowners (though not building owners/managers) perform no positive economic function. From the land user's point of view, it doesn't matter if the land is owned by the state or a private landlord. What may matter is who owns and manages the building, but as Singapore demonstrates, one can have well-built and managed skyscrapers on leasehold land. The function of the building provider and manager is distinct from that of the owner. Indeed, in many cases, private landowners may be incentivized not to build or maintain any buildings on their site.

From the tenant's perspective, the only meaningful difference is if they themselves can become landowners. So widespread land ownership (or at least secured holding – e.g., lifelong perpetual lease) is the preferred option for all voters. In the absence of this, whether the land is owned by a private landlord or the state doesn't matter. Most would likely prefer the latter, as at least this way, the rent they pay for using the land goes towards supporting public expenditure.

As the old saying goes, it's not a reform when it's not a land reform. Addressing the land question is the essential, albeit insufficient, condition for resolving not just housing issues, but also broader inequality and socioeconomic insecurity challenges.