Ownership illusions: Housing policy and competition in the property system

Part 4: For upzoning to result in lower prices it must generate price competition. But that is not possible in a property monopoly system.

Read Parts 1, 2 and 3, of this four-part series.

In case you missed it, I have a new working paper out with co-author Tim Helm, entitled Ownership Illusions: When ownership really matters for economic analysis. In the paper, we look at four situations where failure to recognise the structure of ownership leads economic analysis astray.

Today, I want to expand on our fourth and final example.

Part 4: Housing supply policy

A key economic argument informing housing policy globally is that land prices for any given level of demand are influenced on the supply side by the concentration of ownership, rather than the fixed supply and inherent monopoly of each location alone. It presupposes that there can be meaningful “competition” between landowners and policy changes to promote this can engineer lower land prices.

For example, upzoning creates more potential different property owners who are able to develop new housing, and hence the additional competition encourages faster new housing development and lower prices.

However, if ownership concentration is irrelevant for competition and land prices, granting additional use rights to many owners via upzoning can no more push down the value of those rights than can granting them to a single owner. And why would a single owner place a lower value on more rights than on fewer?

Consider first one individual owning all the land in the titles system. They would clearly act as monopolist, maximising total land rent (equivalently, average land rent per sqm). This means pricing each location at the highest price achievable – since lowering the price for any one location cannot raise the prices received for the others.

Could dispersed ownership change this?

One way to divide ownership is by a share registry in which each owner gets a fixed percentage of the total rent from the titles system. However, the owners’ incentives here are clearly to preserve the monopoly outcome, i.e. to maximise total land rent.

Another way to divide ownership is by location shares. Each owner gets a geographical portion of the property in the titles system, with each part defined by cadastral mapping. This more familiar form of land ownership is akin to a franchise model. Indeed, land ownership was historically called ‘enfranchisement’, as it entailed buying a locational share of the system and freeing oneself from obligations to a (land)lord. Enfranchisement often came with a right to vote as well. Nowadays franchising is a way of dividing ownership within larger organisations, such as fast food chains, by defining rights linked to location.

That landowners could in principle restructure ownership from an evident monopoly to the familiar location share model (or vice versa) suggests the pattern of ownership is not a key factor in determining competition and prices in land markets.

The two structures are illustrated in the figure below. The percentage share model (at top) is a monopoly by any standard definition. If land markets can be made competitive then swapping to area stakes of equal value (at bottom) should result in lower prices – but it is entirely unclear how this is to occur.  

With location shares each owner sells access to their own location at the highest price possible. But this is the same pricing rule as under monopoly ownership. Whether the total rent across all parcels is maximised or the rent of each parcel is maximised, the pricing is the same. In other words, location share ownership provides no more incentive to compete down land prices than under concentrated ownership. It is the monopoly land titles system and impossibility of free entry that matters for incentives – not the pattern of ownership of this system. 

The key policy question is not about concentration per se but about upzoning. Can granting additional land use rights see the value of all such rights competed away?

If all land was owned by one individual (or by percentage shares) then the owner (or owners) would clearly retain the option to price access at least as highly as before. Upzoning would allow for higher total land rent, but not lower.

But consider that the equivalence of pricing under monopoly and location-based ownership holds for any given set of zoning rules. There is no reason to expect individual location owners to react to upzoning any differently, such as by competing down prices. The granting of additional rights without additional obligations cannot provide negative additional value to the recipients.[1]

Underpinning such claims is an ownership illusion, the idea that ownership concentration always matters for competition – an intellectual reflex from training in models where location is irrelevant and entry is free, conditions that never apply to land.

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[1] Upzoning can clearly provide positive value (i.e. cause higher overall land prices) if the prior zoning rules were binding, that is, for some parcels prevented higher-value uses from occurring.