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A Long Game

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76 pointsalwaysdoit46 comments

When I was younger, I didn't understand the appeal of https://en.wikipedia.org/wiki/Georgism 's https://en.wikipedia.org/wiki/Land_value_tax ; proponents came off as cranks. But the more I learn about California and the Bay Area and watch the rents (in both senses of the word) rise, the more I think there may be something to it.

Georgism is deeply rooted in the Law of Rent and David Ricardo's work on the matter. So to say Henry George was a crank is sorta like saying Ricardo and the law of rent is bunk. The reality is that all land (be it physical land, IP, or some other natural or non-natural monopoly) always leads to its owners extracting surplus value in the form of rent. Be that rent coming in it's literal form or as something masquerading as fees.

I think the worse problem is that some Georgists are bad at explaining that integral point which leads to confusion as to what their contention is all about.

It is largely due to the fact property taxes were largely frozen by a funding source under Reagan. Without that, really, the only place that would have an issue is SF because its surrounded by water and doesn't want to change.

Prop 13 was passed in 1978, which was after Reagan had left the Governor's office and prior to his election as President. It was Jerry Brown leading California and Jimmy Carter in the Oval Office.

The idea that only SF would have an issue seems like fiction to me. Maybe there would be no issue for tech workers. But for the median income, there would still be issues. Prop 13 was passed because residents were being driven out of their homes due to tax bills from rising property values - my parents were nearly driven out of their house in San Jose before the passage of prop 13. And they bought it in 1972. I don't see how repealing prop 13 will necessarily remove a problem that existed before prop 13.

To the degree that there's a fixed amount of housing (or, more accurately, a supply of housing that isn't increasing at a rate sufficient to meet demand), it isn't. The only question is who gets to live in that housing and how much they pay for it.

People who live in very expensive real estate that they own already have the option to take their profits and move to Las Vegas or wherever. However, I'm very hesitant to say that property taxes are a legitimate lever to force people out of their homes for the benefit of tech workers moving to California. Especially given that 50% or more of property taxes go to school services which longtime owners aren't even using.

Perhaps the rate of allowable property tax increase in California should be larger than it is or there should be other changes--including making it possible to build more housing--but we should be skeptical of policies that systematically force long-term residents to move away.

The problem is that the old single family housing unit is occupying valuable land which could better serve multiple families at a higher density.

City cores are about increasing the density of human population so that network effects increase productivity, decrease cost, or both thus raising the efficiency of limited resources.

The correct way of regulating the cost of a city is based on a combination of the usable area occupied (probably a 2-dimensional area unless someone is able to build above/beneath a given property), the number of tenants there and the 'useful floor space' (exclude hallways, balconies, etc) they receive for whatever their rent is (property taxes are rent paid to the municipality for use if it's commons resources; IE being close to other things and being able to reach them).

The government should be driving /down/ the price of housing when it is too high by pushing for the construction of denser housing in the urban core to drive the market curves from the supply side.

The government should also have it's tax structure setup in a progressive way (penalize rents not in the lower half of the equilibrium, including home owners that outright own their home (and thus only pay property taxes)).

When the market is over-saturated (as it would be if an area is deflating), it should be supporting the existing prices on the market by keeping taxes high, buying back properties that are sub-standard, and focusing on their re-development in to civic goods; some examples of which are parks, arts facilities, or facilitating new small business experiments.

Tracking the number of tenants in each building is an enforcement nightmare once you add a financial incentive to misrepresent it.

Just add a low density housing tax. Wait, don't call it that - call it a land-use tax adjustment. Measure ability-to-house-people as some combination of square footage of habitable area, bedrooms, bathrooms, and number of rental units. Divide by the lot size. Multiply by a large enough negative number to incentivize building, then add a constant to make it revenue-neutral instead of a subsidy.

This would effectively subsidize people who build higher-density housing at the expense of people who own parking lots or commercial real-estate. It's a little troubling to tax commercial development or offices, but it's already much easier to get approval to build jobs, so cooling that down a bit shouldn't be a huge issue. Besides, you can dodge the tax with mixed-use buildings, which is generally something that you want for efficient land use.

Land-value would be a better way of assessing the multiplier, but that's not constitutional for California to enact because of Proposition 13. So, it's back to a square-footage with a housing capacity offset.

Sounds like a hog confinement operation. I don't think that livable city cores are about anything like that. Maybe less dense cities are a better goal.

I suppose that it could be interpreted that way, however the point of the tax rate being 'progressively' designed is to encourage /both/ low rents and more space for rent (as a way of reducing the taxed assessed against the property value).

Urban planing is also supposed to include parks, recreational facilities, and a generally vibrant mix of entertainment types near a population. A utopic city is supposed to be /better/ than rural lifestyle because of increased opportunity of all types. Having grown up in the suburbs, the only opportunity that affords is disenfranchisement; which is what I also hear of the rural areas.

>A utopic city is supposed to be /better/ than rural lifestyle because of increased opportunity of all types.

I've got nothing against cities and have lived in them (and drive in currently for various events). There's also nothing wrong with living on a number of acres that give you a degree of privacy and separation that you don't get in a city.

Personally, I'm not a fan of classic suburbs but cities aren't a utopia for everyone either.

If cities could be more dense, we could pack the same number (or even more) urban-loving people in less space, and there would be more space left over for the rural-lovers elsewhere.

What we get instead is low density sprawl.

We are not gonna run out of rural. That's a red herring.

Sprawl happens because its a free market, and people buy that stuff (suburban housing).

The US doesn't have a free market in housing. There's lots of stupid zoning and covenants.

Yes, some people like suburban sprawl and buy it, but the alternatives are pretty much illegal in most places. See eg http://cityobservatory.org/my_illegal_neighborhood/ (The neighourhood featured there is still too sprawly for my tastes, but already illegally dense.)

Maybe where you live. I live in the country, where none of that happens. Good luck with that superior city living!

You are entitled to your preference, but the majority, the many millions of people who flock to cities, disagree with you.

No, go ahead and like cities, that's fine. But the goal of city design isn't packing folks in tighter and tighter like a cattle car. There's got to be a better metric.

And I'd argue, many folks flock to cities because, work. They shouldn't be counted among the fans of urban living.

It's impossible to drive housing costs down via development, unless you also ban immigration. Development promotes further population growth. The ideal is high rent AND high income.

Not sure if trolling, but if supply (housing) increases faster than demand (immigrants) prices go down (assuming you believe in Economics 101).

You could argue that it's impossible to build fast enough to surpass immigration rates, but that seems pretty easily disproved (for instance: Las Vegas since 2008 [1]).

Or did I misunderstand your argument?

[1] http://www.deptofnumbers.com/rent/nevada/las-vegas/

I believe the issue is that development alone isn't the biggest factor in city size and housing costs. At least not in an international market. As you bring the costs down, either more people come into town, because the job opportunity is good and the rent is low enough they can make good money, or money flows in from elsewhere until the prices go back up.

The Las Vegas example was coupled with a global downturn especially focused on real estate. Also, geographically, Las Vegas has more possibilities for expansion outward than SF, and it doesn't have the tech workers bidding up the prices as badly.

That sounds like the Field of Dreams[1] theory of civic planning, and I'm pretty sure there are plenty of examples outlining why it doesn't always work out well. For one, Detroit.

1: "If you build it, they will come."

There are compromise moves that are possible with political will. Eminent domain + temporary relocation assistance + a guarantee to be able to own a unit in the newly constructed building.

Knock down a 2-story house, replace with a 50 story one. Give the former owner a 1 or 2 bedroom in the new place, and put them up in a hotel while construction is underway. A small price to pay to get a whole lot of new units.

Google [Kelo]

The problems that Prop 13 causes may be far larger than the problem that inspired Prop 13, but that doesn't mean that this initial problem (that is, highly unstable property taxes) shouldn't be addressed.

Personally, I think the work of Shiller, as outlined in his work "Macro Markets", is the best solution: insurance policies that homeowners would buy to protect against price changes. A variant would be insurance against changes in property tax itself, offering as a good hedge to property owners.

The problem the inspired Prop 13 was that poor people got school funding from rich people.

This is also very true.

It's an injustice that school quality is usually determined by local property taxes, but if the alternative (sharing) leads property owners to throw a fit and defund everything, perhaps it's the lesser evil.

And one more point: property taxes, as they exist currently, are determined by whatever level of taxation local governments can get.

A LVT, as correctly supplied, would not be determined by government, but rather the market prices itself. That is to say, it would have inherently less instability, as it would avoid politicization altogether.

What if prop 13 didn't apply to investment property? How would the situation be different? Your parents and whoever could get the main benefit, and new buyers would still brunt the main cost, but at least people who want houses could possibly get them instead of investors and other people parking cash and/or literally and technically collecting rent.

Sorry to link to a pay-walled article, this headline tells the story:

"Investors With Cash Edging Out First Time Home Buyers"

http://www.wsj.com/articles/investors-with-cash-edging-out-f...

When property changes ownership, its tax basis bumps up to market value anyway. Properties bought to be flipped don't benefit from Prop 13; it's not like rent control that carries over.

I think the parent comment is saying it could incentivize owner-occupied properties over rentals by untethering the taxable values for long-time landlords who are benefiting from Prop 13.

Of course, you'd probably also have to drop rent control to keep things "fair" (otherwise your taxes go up, but you can't increase your rent), but that's probably the right move anyways:

"There’s probably no topic that economists agree more on than rent control... It is not an effective way in the long run to preserve affordable housing in an area in which demand is rapidly rising" [1]

To me, the core of the problem seems to boil down to this:

- if I move somewhere cheap and build up the area's value, I should get to stay there and enjoy it without paying a lot more (in taxes) and/or being forced to move because I can't pay

- if a community chooses to invest in an area's infrastructure, all those who benefit (local residents) should all pay their fair share

I don't know what's the right solution, but if it falls closer to the "pay your fair share" side then we as a society need to accept the psychic cost of sometimes forcing long-term/elderly/poor residents out (softening the blow by the dramatically increased sale price of their home).

Although Futurebot's innovative "develop their land and give them a place in the new building for life" idea seemed to be heading towards an interesting place as well.

Living in a rapidly gentrifying area myself, I see the struggle every day. I understand the emotional appeal of "let longtime residents stay in their homes despite economic hardship", but can anyone elucidate more clearly what (if any) argument exists around the economic value of their contribution for "finding it first" and building up the value there?

[1] http://www.moneytalksnews.com/why-rent-control-wont-make-hou...

CA's property values are tied to the heavy market subsidies, one of which is low property tax and the political guarantee it will remain low. I understand many people would be screwed by higher property taxes but ultimately, the revenue had to be made up somewhere and its made up largely in the form of income taxes.

However, I think Prop 13's distortion effects are far worse than the alternative.

This is quite long, but very interesting. Make sure you check out part 2 here: http://techcrunch.com/2016/01/29/nothing-like-this-has-ever-...

After reading that I better understand what my own opinion is but what I was having trouble articulating.

Quality of life is important, and different people will value different things as different weights in their quality of life.

However one area that the governments we elect are failing us is improving quality of life by creating a more fair playing field for all (as well as generally using the bonuses from that to enrich the playing field for all).

How much value would be realized if this massive and complex problem is fully addressed in the Bay Area (and the solver properly compensated)? $100B?

The scale of it all is huge, but so is mining asteroids.

The Bay Area currently has 8 million and change people in it. A reasonable estimate of "fixing the housing problem" would add another million. Assume $1000/yr per additional resident in extractable economic value, and a net present value of twenty times the yearly income, and you wind up with a problem that's worth roughly $20 billion.

Why not another 8 million? The Bay Area could be Tokyo or London. NYC could finally become #2.

More than just people, entire industries might find this a better place to operate if housing were not such a burden on workers. No doubt this is an amazing place to do business, but in the long run "only the paranoid survive". In some parts of the Bay Area economy, jobs and factories have shipped overseas. Why is that? Could costs be involved?

There are also the huge secondary effects of dramatically reducing a key cost or other burden that reduce the creative potential of the economy. Where would we be without Moore's Law? Where would we be if we could do that in other parts of our economy?

In Taipei for example there is a huge supply of "small spaces" for small businesses, and this space is very cheap to rent. The price of food and other services are extremely low partly due to this, an important component of the amazing food scene that is happening there.

Much innovation and value are unleashed by improvements in the underlying costs and conditions.

The Bay Area currently has 8 million

The San Francisco / Bay Area MSA has only 4.5 million: https://en.wikipedia.org/wiki/List_of_Metropolitan_Statistic.... But the rest of your post is well taken! Given the low energy cost of heating / cooling in the Bay Area, and the high concentration of smart people and economic activity, more reasonable housing policies would dramatically improve a lot of lives.

There's multiple confusing metropolitan areas, depending on what you want to count. See: https://en.wikipedia.org/wiki/San_Francisco_Bay_Area which lists it at 7.44 million.

The 4.5 million is for San Francisco-Oakland-Hayward, which notably excludes San Jose and things more associated with that part of the area.

>A reasonable estimate of "fixing the housing problem" would add another million.

Another reasonable approach to "fixing the housing problem" is realizing that not everyone can live in a handful of popular areas. Even if incremental building happens. Even if tax policy changes. Not everyone in web/social/mobile development can move to the Bay area. Indeed, many probably don't want to.

Indeed, that's the information that housing prices convey - how badly you want to move into a particular area. The problem is that the current residents of the Bay Area are using this demand to extract economic rents. They're even encouraging it: see how much easier it is to bring 10k office jobs to the area than it is to build 10k bedrooms.

I'm fine with limiting the size of the Bay Area, but not as a deliberate maneuver to move wealth from the tech ecosystem to the fortunate landowners in the area.

You could put a city like Hong Kong or Singapore in some part of the bay area, and put quite a few willing people in there.

Definitely agree. Once any area starts to take on the characteristics of a modern megacity, it becomes self-sustaining.

I would even go as far as to say that megacities attain the closest thing to a singularity that human beings currently experience.

I used to live in Singapore. Didn't feel very singular.

I don't know what to say to this, except that I'm glad I'm not in San Francisco -- and my thoughts and sympathy are with everyone who is. (Except the Boomer homeowners who've voted themselves an exemption to property tax.)

It's amazing we spend 50% of our income on something which, from a first principles perspective, could asymptotically approach free. Too bad housing markets aren't actually efficient.

Kim is easily in the top 3 writers ever at techcrunch

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