Roger Sandilands wrote:
"2. If I expect the price of land to rise faster than the normal return on other ways that I might invest my money, I would park my savings there. So would other people, and so long as these expectations persist the price of land will continue to increase. Our expenditures do not increase the supply of land, so a rise in its price has no tendency to be reversed through a rise in its supply. This is what makes land unique. Purchases of land -- whether by speculators or entrepreneurs who want it because it is needed to produce shoes or whatever -- are merely transfers of existing title deeds. However, if the price of land is driven up, this increases the land element of entrepreneurs' production costs. These rising costs eat into entrepreneurs' profits. Production will slow, and this weakens entrepreneurs' demand for land. As land prices begin to soften so too would the speculative demand for land. Land values will eventually fall and this will help a recovery of profits on real
production, but no thanks to the 'work' of speculators."
As the occasionally visiting non-economist, I'll offer a comment and some questions. It is certainly true that the supply of land is relatively fixed (neglecting the likes of Dutch polder, a landfill Hong Kong airport and the new Islands of Dubai or the sand dunes of Cape Cod or the hillsides of Malibu sliding off into the sea). But urban land seems different from the classical model of agriculture or rural land. Whether by investment or speculation, if there is demand for occupancy (the source of rent) there will be an increase of the supply of occupancy units even while the supply of land remains constant. First land will be built edge to edge and then up. First within the confines of current legal and technical capacity and then through pressure to legally allow higher density and support it through infrastructure. Is that an increase in the supply of "land" or an increase in its productive capacity? Are they simply both forms of the same capital with no meaningful distinction?
In any case the supply of occupancy units increases, rent increases and land values increase. High rise building is more expensive and each higher occupancy unit has a higher cost of production. That's fine as long as rents rise to cover them. But if supply exceeds demand values may fall. All, I think as Roger describes.
Mason Gaffney's paper New Life in Old Cities
http://www.masongaffney.org/workpapers/2006_New_Life_in_Old_Cities.pdf
describes the effect of NYC tax policy through the '20s. New residential buildings (occupancy units) were exempt from property tax, but land remained taxed. This resulted in new building and population growth that outpaced other cities. Assumably, a) demand for commercial occupancy units might rise with population and b) commercial building old and new remained taxed in addition to land.
Alison Isenberg's Downtown America: A History of the Place and the People Who Made It, and other sources describe an interesting phenomenon after 1929 and through the Great Depression: In Detroit, NYC and other urban centers many commercial buildings were razed and the bare land used a parking lots, or buildings were reduced in height to 1-2 story "tax payers" as investment survival strategies. No doubt some investors did this to hang on through tough times and others - the opportunity buyers or "vultures" of their day - swooped in to bet on future value increases when markets recovered.
So my non-economist's questions are whether taxing buildings as part of "land" created this phenomenon of reducing the supply of occupancy units and when or whether the distinction between land and improvements matter? Professor Gaffney describes "3 factor" (land, labor and capital) and "2 factor" (labor and capital only) economists. If land and buildings are taxed ad valorem, that is based on that ability to produce rent, does the distinction matter? If buildings are exempt from taxation will the increase in land rent result in an offsetting increase in land tax revenue?
Scott Cullen
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