I only recently became aware of the leasehold system on residential property in the Australian Capital Territory. This was an interesting attempt to create a city in which rent seekers and speculators would not prosper by allowing the increased value of land to accrue to the government (and by extension the common weal) instead of owners who had not contributed to rising prices. This account describes both the ideals behind the concept and attributes its failure to disinterest and miscomprehension on the part of administrators. Which is a pity, knowing the power of rent seekers, we probably won’t get another chance to experiment like this again.
One of the interesting arguments from the time is that since any rise in land prices in the Canberra region would be due to the building of the capital with taxpayer’s money, it was only fair that this be returned to the government. From the account above:
As King O’Malley (Labour, Tas) saw it, ‘Every dollar spent by the people of Australia in the erection of that capital will create an unearned increment in the property for miles around. The question is, are the people of Australia prepared to spend thousands, yea millions, and then lose the benefit of their expenditure? I say the unearned increment created by the expenditure of the people’s money belongs to the people…”:
This has strong resonance in public policy today, particularly at the state level. A great deal of the services provided by state governments are improved by proximity. People exhibit a strong preference to be close to schools, hospitals and public transport. The premium paid on housing close to transport (particularly rail) is very high1. This probably explains why CityRail (NSW) passengers have higher incomes that the rest of the state. They have to be to afford access.
This means that a great deal of the value of public services is being appropriated by private landowners who have not contributed. Moreover any extension or improvement of services (for instance building a new rail line) will further enrich private landowners on the taxpayers expense. Objections about equity standing, extending or improving services almost always requires more money, and state budgets have been ruled by narrow financial considerations of appropriate expenditure that have led to a series of dubiously designed Private Public Partnerships. If this private accrual of value was somehow accrued by governments instead, then we might well see a far greater investment in say much needed rail infrastructure because the financial case to the beancounters would be far easier made.
The question is “how?” It’s extremely unlikely that a leasehold system, no matter how well designed and administered could be set up in an already existing city. It’s politically impossible. So what are the options?
We could simply charge more for the services so that the subsidy isn’t incorporated into hedonic pricing. In some cases this is simply impossible because the services are public goods. In other cases I think it will simply be ineffective. Sticking with rail, higher fares would likely effect the price elastic customers who have traded time for money (or space) by living further from the station. They will take to driving instead (with other negative effects) whilst the price inelastic customers who paid more to live close will still push up housing prices and pay the higher fares.
Another option is increase land taxes. Rates could be levied by state governments with local governments funded by transfers from state governments. The rates could be determined by a independent body using hedonic methods to tax land that has accrued in value. This would be efficient taxation on the face of it, but it would also be very politically difficult. Higher rates would impact on existing owner occupiers who do not value the service or are unable to pay. They can move of course, but it’s a strong value in our society that residents should not be forced out easily. This is understandable since we also highly value our localised social and support networks, which also have a great deal of public value. The paper might lead with a heartbreaking story of the pensioner forced out of her home, but the flexibility forced by the rates may cause other disruption to the social fabric. We could grandfather the real value of rates for existing owner occupiers (the government as infinitely lived entity can wait them out ) but this would create even greater disincentive to move, resulting in both lower labour mobility and housing stock filled with empty nesters who would avoid downsizing and losing their lower grandfathered rates.
Capital gains tax may also be increased and given to state governments, but there have proven to be great political difficulties with this.
What other options to we have to ensure that the “unearned increment” accrues to the government whose expenditure raised the prices? It might be the best way to improve urban infrastructure and services.
1 An AFR article on the weekend (not online) cited residential land values around the Chatswood-Epping rail link in Sydney rising higher than the rest of the Sydney market since the link opened. This is the more striking considering how little thought was given to providing access to nearby residents compared to the business park. People are really keen on rail.