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Land Value, Land Rent and Progressive Housing Policy

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no. 185 / Fall 2010 23
Land Value, Land Rent and Progressive Housing Policy
by Stephen E. Barton
Land value is created by the larger society, not the
private owner of housing. The rent tenants pay to
private landlords pays for both the building and the
land, or location, so the land rent exacts payment
from tenants for value the tenants have helped to
create. Understanding the social nature of land value
and land rent can strengthen our arguments for
progressive housing policies.
Many progressive policies, such as inclusionary
zoning, rent controls and non-prot housing
development, have in common that they help shield
lower income people from the exaction of land rent.
Policy analysis drawing on the concept of land
rent refutes much of the market-based critique of
progressive housing policies on its own terms, since
standard economic theory accepts that land rent
can be regulated or taxed without harmful effects
on the production and maintenance of housing. The
progressive agenda should explicitly call for recapture
of socially created land value to fund alternative
forms of ownership, such as community land trusts
and nonprot housing corporations, which remove
residential land from the market.
The current American economic structure is designed
to enable businesses to convert socially created value
into private prots, and the collectively created value
of urban life is no exception. Residential real estate is
a form of property that combines buildings and land.
When people rent an apartment, part of their payment
supports construction, operation and maintenance
of the building (building rent) and part is for access
to that location (land rent). While the owners (or the
owners’ employees) are responsible for operating
and maintaining buildings, the value of the land is
a creation of the entire community and the owners
are paid for the land value generated by the society
around them. Tenants contribute to making the city a
better and more interesting place and in so doing they
increase land values, which increases the rent they
have to pay to continue to live there.
A recent study conducted by the Berkeley Rent
Stabilization Program found that the high rents in the
San Francisco Bay Area, where the median monthly
rent is approximately $1,200 compared with an
average of less than $700 for all U.S. cities, cannot be
explained by higher quality, higher operating costs or
higher construction costs. The higher rents are simply
land rent.
Land rent is a form of “economic rent,” meaning
unearned business revenue that is over and above the
price that would be sufcient to produce, operate and
maintain housing in a perfectly competitive market.
This rent is based on ownership of scarce resources,
in contrast with prots that are earned through
production of additional goods. While these concepts
are a standard part of neoclassical economic analysis,
conventional public economic discourse avoids
mention of them since they could help reveal that
excess prots and exploitation are a routine part of our
current economic system.
Idealized free market discourse draws its
persuasive power from implied moral claims and
explicit policy claims that are clearly false when
land rent or other forms of economic rent are
significant factors. The first and most important
implied moral claim is that business revenue is
normally earned through production of goods and
services. Business revenue from land rent clearly
violates this claim. The landowners are paid not
for what they have produced but for what urban
society has collectively produced.
A closely related policy claim is that price increases
that generate economic rents will be temporary until
increased production brings prices back down to the
necessary minimum. In most areas with high housing
costs, however, economic rent is a long-term feature
of the housing market. In the Bay Area rents have
increased faster than the average rent for all U.S.
cities since the late 1950s.
Progressive Planning
24
A second related policy claim is that if housing prices
remain high this is because government is interfering
with the free market through land use regulations,
so that the solution is removal of regulatory barriers
to housing development. Neoclassical economic
theory concedes that taxes or regulations that affect
only economic rent will not have harmful effects on
the production of desired goods and services such as
housing, but conventional economic rhetoric tries to
bury this point by pretending that land rent can be
eliminated.
In reality, land rent is a long-term structural feature
of many successful urban areas. Residential buildings
are easy to build, but land suitable for multi-family
residential development can be extremely difcult to
“produce,” particularly within the already densely
developed urban centers around the San Francisco
Bay. Three quarters of the area within fty miles of
downtown San Francisco is either water or steep hills,
and major public investments in rail transit have
reinforced the value of central locations. There was a
serious proposal in the 1950s to ll in most of the Bay
to allow for development. This would have provided
a market-oriented solution—by removing the Bay—
adding hundreds of square miles of new land and
lowering the value of the surrounding land. (This
dystopian vision led to creation of the San Francisco
Bay Conservation and Development Commission.)
Many suburban communities restrict development
of multi-family housing, denying lower income
tenants access to all areas of the metropolis. These
discriminatory barriers should be removed; if people
are good enough to work in a community they
should be free to live there as well. The best available
evidence, however, is that in California highly
restrictive land use regulation is found mostly in
scattered, upper-income suburban cities and has little
effect on overall rent levels because development takes
place in other nearby cities instead.
A clear understanding that land rent is a permanent
feature of many regional housing markets leads
directly to an understanding of the need for
progressive local housing policies that help shield low-
income people from the market, create long-lasting
organizations that can help build the movement
for social justice and provide working examples of
alternative ways of organizing society. Progressive
housing policies typically include regulation of the
existing rental housing market, requirements or
incentives for new development to include some
housing at below-market rates and alternative forms
of ownership. All of these programs help reduce
or redistribute land rent, and they can be made
more effective if the redistribution is systematically
considered as part of their purpose.
Rent control is widely disapproved of by
conventional economists on the grounds that price
regulations will reduce the quality and quantity
of the controlled housing stock. This assumes a
perfectly competitive market in which land rent does
not exist. Economist Lee Friedman has pointed out
that in the presence of land rent, “rent control could,
in theory, affect only economic rents and cause no
supply inefciency even in the long run.” Neil Mayer
points out that in tight markets where low-income
tenants have few alternatives, the market does not
provide substantially lower rents for units with poor
maintenance and that rent controls can improve
maintenance through the threat of rent reductions for
violations of the housing code.
Strong rent controls meet constitutional standards
when they allow increases for increased operating
costs and at least a partial inationary adjustment
for net operating income. This is roughly equivalent
to preventing future increases in economic rent.
However, regulating thousands of different landlords
locks into place a permanent political conict
between well-organized and well-nanced landlord
organizations and more numerous but usually poorly
organized and nanced tenants. Strong rent controls
were abolished in Massachusetts and California,
surviving for a long period of time only in New York
City and some nearby cities in New Jersey.
California continues to allow moderate rent
stabilization systems in which units are decontrolled
on vacancy and then recontrolled again at the new
market rent. Moderate rent stabilization systems
protect all tenants from displacement and unjust
evictions and can provide economic benets to long-
term tenants. The dot-com bubble of 1999-2001 created
no. 185 / Fall 2010 25
an upward spike in Bay Area rents that would have
displaced far more tenants than it did if rent regulation
had not been in place in San Francisco, San Jose,
Oakland, Berkeley and East Palo Alto. Moderate rent
regulation does little to hold down land rents overall,
however, since most tenants move within a few years.
Metropolitan areas with high land rent are
characterized by tight housing markets and a severe
shortage of units affordable to low-income tenants.
Subsidies for new construction or rehabilitation
of existing housing for the benet of low-income
people are essential but need to be accompanied
by forms of social ownership that permanently
remove land rent from the cost of housing so that
the housing will not revert to market rents or prices.
Social housing ownership can take different forms:
nonprot housing corporations, community land
trusts that lease the underlying land to people who
buy the house or apartment above it, resident-owned
corporations such as limited-equity cooperatives or
mutual housing associations.
Social ownership creates long-lasting organizations
with an interest in developing more affordable
housing and in other social equity issues important
to the residents. Rent controls and rental subsidies
are both subject to being reduced in scope or
even abolished if there are political changes. In
contrast, non-prot-owned land and housing is
constitutionally protected as a form of private
property. Subsidies for new development could
be cut off, but most of the organizations and their
affordable housing would survive. (Social ownership
reduces the need for ongoing rental subsidies but
does not replace them because there are many people
with incomes too low even to pay the operating costs
of their housing after land rent is removed from their
rents or share payments.)
Changes in land use that allow developers to build
at higher densities generate unearned increases
in land values. Nico Calavita and Alan Mallach
have described the density bonus programs and
inclusionary zoning requirements that many state and
local governments use to tap into these increased land
values in order to provide below-market rate housing.
The case for tapping into increased land values is
particularly strong when the increases in land value
clearly result from public investment and publicly
created plans and accompanying changes in land
use regulations, as in the creation of transit-oriented
development corridors.
Valuable as these programs are, they miss the
extraordinary levels of land rents in the already
existing rental housing stock, especially in coastal
California and the Boston-New York-Washington
D.C. corridor. Currently the total annual rent paid
by tenants in the high rent areas of coastal California
totals over $48 billion: $15.6 billion in the Bay Area,
$26.6 billion in the Los Angeles area and $6.3 billion in
the San Diego area. At least one-quarter and probably
one-third of this amount, $12 to $15 billion a year, is
land rent. Taxes on this unearned revenue from land
rent, even if limited to future increases, would provide
an equitable and economically efcient means for state
and local government to support housing programs to
mitigate the harm done to low-income tenants by high
land rents.
Joseph Schumpeter pointed out that over the long
run economic efciency is much less important than
creativity and innovation. Most of the critiques of
progressive housing policies claim that these policies
are inefcient, something an analysis of land rent can
often refute. But what really matters is nding the
policies that best support the creativity of American
cities. We need to nd ways of managing the urban
economy that more fully value the contributions of
the writers, researchers, artists, craftspeople, teachers,
nurses, attendants to the disabled, gardeners, workers
in neighborhood restaurants and retail shops and
the many others who are only sometimes nancially
successful but who together make cities great places to
live. One of the ways to do this is to identify strategies
for recapturing land rent—a privatized form of our
socially created wealth—and reinvest those resources
in making housing decent and permanently affordable
for all the diverse people of urban America.
Stephen E. Barton, (sbarton@ci.berkeley.ca.us), Ph.D., is
deputy director of the Berkeley Rent Stabilization Program.
The views expressed in this article are those of the author
and do not necessarily reect those of the Berkeley Rent
Stabilization Program or its Board
ResearchGate has not been able to resolve any references for this publication.