How I learned to stop worrying and love high land values

A speech by Emily Sims of Prosper Australia to the Planning Institute of Australia

Find the original speech here.

---

Today I want to take you on a rapid intellectual journey, a therapeutic crash course, to convince you all to stop worrying about housing affordability and instead learn to love high land values.

Land takes the gains…

Riddle me this: When planners get it right—when transport networks provide access to jobs and markets, when tree-lined streets are “buzzing” with cool stuff going on, when the rules make it easy for developers to build nice homes—do land prices rise or fall?

And when planners get it wrong—when it’s a slog to get anywhere, when infrastructure is underprovided, uncoordinated and expensive, when productivity is shot—do land prices rise or fall?

Given the tenor of the housing policy debate in Australia over the past decades, you’d be forgiven for thinking that they rise in both cases.

Good planning? That makes for desirable places, which means high demand, and high prices.

Bad planning? That makes for scarce housing, “unresponsive” supply – and high prices.

Planners are damned if we do and damned if we don’t.

The thing is, planning can only ‘choke supply’ if there is demand, and demand comes from jobs and growth.

Yes, we want cheap housing, but not if it’s cheap because the industrial base has collapsed and no one has a job.

Urban agglomeration enables sharing, matching and learning in place. It produces positive ‘spillovers’, jobs and growth. 

That productivity gain then raises incomes, and desirability, which bids up land where there’s good transport access. 

The mysterious self-sustaining swirl of urban agglomeration doesn’t lift all land values equally. Winning cities are economic powerhouses and they concentrate wealth geographically. 

Good planning aims to limit the negative externalities and grow the positive ones. If succeed, we boost land values.

So, in a successfully planned city, in a successful economy, there’s expensive land and housing. 

A core axiom of the Georgist school of economics—the lens through which Prosper views these problems—is “land takes the gains.” 

Land values effectively measure our economic (and policy) success in placemaking.

Monopoly is a structural feature of land markets…

Why does land take the gains?

Because it’s inherently monopolistic. 

Land, or perhaps more accurately, location, is the original monopoly.

You don’t need lots of land for monopoly. Every landowner is already a tiny monopolist over a location that isn’t perfectly substitutable with others. 

Each location is unique and can’t be reproduced easily, if at all. 

So however you define location—street, or suburb, or LGA, or city—the amount of land is fixed in supply. 

Over this geography, we lay strong private property rights. We enforce exclusive possession. 

Together, these things form a “barrier to entry”, which is what defines monopoly. 

We see evidence of monopoly in land rents never being competed away to zero. 

Land costs nothing to use because it’s already there, but it’s never priced at zero.

We also see this monopoly characteristic in withholding land from use. 

No one in a competitive market can afford to deliberately under-use their resources. But with land that happens all the time. 

So, innovation and high-value production occurs in geographically concentrated ways, land takes the gains, and each location has characteristics we can’t easily (if ever) substitute, over which we lay institutional property rights – then we trade. 

Markets allocate resources according to purchasing power…

Now, recall that markets always and everywhere allocate resources according to willingness-to-pay, that is, according to purchasing power. 

Not need. Not merit. Money.

Right now, poorer people (or people who arrived later) can’t bid enough land, or construction sector resources, away from richer (or established) people to attain adequate and well-located housing. 

When someone in Toorak gets a tennis court and someone in Braybrook sleeps in a doorway, that is abhorrent, but it’s also the ordinary operation and unavoidable limitation of markets.

Land is a monopoly that markets can’t break.  

Justice requires redistributing the returns to land to make sure that market outcomes don’t grow more unequal. That’s why we push for land at the centre of taxation.

It also suggests the problem of housing affordability should be reframed. 

It’s been framed as a problem of high housing costs. But it’s equally a problem of income inequality and inadequacy. Some of us don’t earn enough to get a decent, dignified share of our collective resources. It is a distributional problem.

The Federal government has the levers for inequality which shape market outcomes. That’s income redistribution through tax and transfers.

State governments have the levers for non-market provision, when market outcomes are unacceptable. That means social housing (states can also tax land and capture value uplift through the development process).

Yet, housing affordability is too often framed as a problem of not enough housing. 

---

Advertisement – Fat Tail Investment Research

Fresh Economic Thinking is reader-supported (thank you). I will also post advertisements from time to time.

Fat Tail Investment Research is an Aussie outfit that publishes research on a range of investment options. The people there have been readers of my work for many years.

Sign up for free using this link for their investment insights about stocks that historically pay a consistent income AND could deliver capital growth.

---

Markets regulate the rate of supply…

It hasn’t always been the case. 

Prosper is an old institution. We remember a time when everyone was obsessed with “the land question.” When the consensus was that land markets were a cause of, not the solution to, inequality.

Then, over the course of the 20th century something happened in the discipline of economics.  The insights about the land and locational ‘rent’ were lost. 

In his recent Henry George Commemorative address Ross Garnaut laid out this history of economic thought in more detail. I commend his lecture to you.

In the early 20th Century we got cars and spread out, and our capital-intensive patterns of industrialisation resulted in less spatial inequality within and between places. Location became less important. 

That’s no longer the case. Since the 1980s, with the growth and concentration of service-based, knowledge-intensive industries – the land question is back. We know it is back because we are all here in this room trying to solve it. 

Our research agenda at Prosper is largely directed towards recovering from collective amnesia, asking and answering the question: what if land markets are monopolies? 

Incidentally, that is also the name of a discussion paper we published last year on the ‘planning constraint thesis’ of expensive housing. 

So let me briefly touch on the idea that widespread upzoning and planning “deregulation” would improve housing affordability.  

Our view is aligned with the Institute’s.

First, there can be no doubt whatsoever that there are myriad places where permissible densities are well below what the market could support. If we upzone these areas, many landholders will sell to enterprising developers, who will exercise their option to develop when market conditions allow. 

We must distinguish though between reallocation of development rights and the exercise of the option those rights confer. 

Cameron Murray asks the right question: If upzoning improves competitiveness and suppresses price growth, why isn’t this anticipated impact capitalised into land prices? Why didn’t upzoning Fishermans Bend reduce land values in South Yarra? 

Development must occur before existing values are affected, and development cannot occur if markets are soft. 

A related question. How much upzoning is enough upzoning? How much airspace do we need to privatise to achieve a market downturn? 

In the somewhat circular logic of the underlying economic theory, the answer seems to be “more, until the price comes down”. 

When we see widespread land banking, when only a fraction of sites that can be profitably developed are actually developed, that says that the market, not zoned capacity,  “regulates” the rate of new supply. 

No private sector developer is at liberty to flood the market and lower their prices and asset values.

We have a report showing that greenfield estates are typically drip-fed to market over 30-40 years. This suggests that these large developers “regulate” the supply of lots to stop prices falling. And so they must. Land development is a risky, profit-motivated business. 

And our vacancy reports have shown that even built property can be withheld from supply. Around 100,000 homes in Melbourne sat vacant or barely used over 2021 and 2022. That’s about 6% of all homes, or two years’ worth of new dwelling construction.

You might have read about the Jewel Tower in Surfers Paradise, where two-thirds of the apartments have still not been put to market three years after construction finished. Why? They are keeping a floor under the price by releasing them slowly. 

This is speculation, and it’s not a fringe concern. It tells us something about the nature of the markets we are dealing with.

Stop worrying and tax land value uplift

That land ultimately captures the advantages of location, and that markets allocate housing according to income, not need, points towards the only durable policy solutions to unaffordable housing: redistribution of income and provision of non-market housing.

This is what we tell our Treasurers: Stop worrying and tax land value uplift. 

Tax it away from us monopolist, beneficiary landholders at a low rate with few exemptions. 

Then spend it on providing houses for people who can’t afford them. Or income support. Or to boost incomes by cutting other taxes. 

If you think supply is the problem, build some. Private developers are constrained by demand and risk. 

Support partial ownership models like community land trusts, where housing costs are quarantined from land value gains. 

Organised landholders never stop lobbying for free money through favourable upzoning. And why not? It’s easy money. Blaming the housing crisis on planning gives you a better shot at this. Put a price on those rights. Take away the honeypot, reduce the flies. 

Muscle through the monopoly problem and reduce the returns to speculation. For example, enact a statewide tax on vacant residential properties. Include unimproved land that has been vacant for 5 years or more. (Then announce this policy unexpectedly at a property industry event just for your own amusement – presumably)

Some of them may even be listening.

---

Thank you for reading Fresh Economic Thinking. Please subscribe and share this article.

Paid subscriptions are available, but for now, only get you good vibes. In 2024, better things are coming. My new book, The Great Housing Hijack, will be released and with your help, Fresh Economic Thinking will evolve into Australia's newest think tank.