You wrote: "High interest rates are a boon to the frugal and virtuous and punish the profligate and foolish."
In a society where things like housing and cars didn't have such a high price compared to wages, I would agree with you. However, as matters stand, high interest rates serve to price out those who want to be frugal and virtuous but have limited means and to preserve the wealth of the profligate and foolish who are well-off.
Good point, a better way to clarify would be to say "at equilibrium." We're at a weird non-equilibrium state where higher interest rates have not done much to lower asset prices as economic theory usually predicts.
Very interesting piece and touched on many areas I have thought about - I think the short answer is 'yes, but will require compromises past generations didn't have to make.'
On one hand there is immense pressure to consume and it is easily spread through mobile devices and social media, which is a totally different landscape than I faced (apparently I am the same age as Mr. Owens). Education, cars, where one lives and the lifestyle you lead are all supercharged by non-stop messaging that most feel hard to resist. One obvious example as noted in the post is the cost of a new vehicle. If you want a minivan or SUV appropriate for a family, a new base non-luxury model starts at $40K now and easily surpasses $50K for some options - and tellingly, if you peruse one of the manufacturer's website the default financing option is just a couple grand down with a 72 month term loan. Obviously if that's what makes this purchase within reach you cannot really afford it, and yet I see plenty of late model cars on the road.
The other great point in the comments is about increasing social disorder and what you have to do to escape it, which primarily concerns where your home is located and what your options are for school. For a truly middle class income, this is going to generally means some significant tradeoffs in terms of how close you are to amenities, work, etc. and what you have to put up with daily as a result. I live in a nice city neighborhood near where I grew up, and when I was a kid most of us walked to the nearest public school. Nowadays the percentage of families that send their kids to private school is up quite a bit and many of the rest attempt to get their kids into more distant but orderly public schools so you don't see many walking to and from at all. My childhood offered a bit more neighborhood cohesion as a result, whereas today on just my block the various kids go to 5 different public or private schools.
"The only explanation that makes sense for housing is a secular change in demand exceeding supply’s ability to compensate, and the explanation for that is the massive immigration of the Biden administration."
In Virginia's comment below, she points to other explanations here. It seems likely that the significant increase in housing cost is multi-causal, not mono-causal. I would need to see the data to believe that THE explanation was immigration.
But the broader point stands. Supply and demand. So, the solution: build, baby, build.
I live in a small city with slow population growth and plenty of buildable land. There's a lot of new residential construction going on now, and has been for as long as I can remember. Yet housing prices have still more than doubled in the last twelve years. I couldn't figure that out until I realized that "demand" is not the number of families looking to buy a house; it's the amount of money that people (including investors) are looking to spend on residential real estate. So demand for housing has grown significantly, even though population has barely risen at all.
One of the biggest errors being made in these kinds of generational comparisons is the true equivalence of these goods across time. Some of those equivalences are not quantitative. The equivalent to a 1960 house is not just a question of square footage or appliances, but also the house being in a neighborhood with the 1960 equivalent crime rate in a school district with a 1960 equivalent public school.
Let me use a personal example. When I taught in the Atlanta area, we paid a premium on our house to live in the "good" school district in our county. Our last year there, a 7th grade girl in my son's PE class got her face slashed up with a razor by another girl who thought the first girl was looking at her boyfriend. The real question becomes this - if girls are getting their faces cut with razors in the "good" school and girls were not getting their faces slashed with razors in a 1960 school, then these schools are not actually equivalent. The best school in the county is actually worse today than the median (or maybe even worst) school in 1960. If you want to truly find the equivalent in terms of quality of life, you have to determine how much more it would cost to live in a place where girls don't get their faces slashed with razor blades in the local school. That generally means that you have to add the cost of private education to the cost of living to calculate an equivalent to 1960 education.
We could do the same with crime rate in general. If you want to find the equivalent value of a house, you need to control for the crime rate. How much does it cost to buy a starter home in a neighborhood where the crime rate is the same as the median crime rate in 1960? The shrinkage of neighborhoods that have a safety equivalent to 1960 shows that the "official" data is off base. The equivalence is about quality of life, not abstract notions like price per square foot.
The reality is that ballooning social dysfunction drives up the real cost of living for middle-class folks who do not want to live amidst violence, squalor, and degrading public services. The question is not "how much is it to buy a basket of market goods." The real question is "how much do I have to pay to avoid the social dysfunction that the government incentivizes in formerly middle-class communities." Matching our parents' lifestyle is not so much about the car or the house. It's about making sure my daughter isn't the next girl to get her face slashed by a jealous 12-year-old with a razor blade. It's about making sure my son doesn't get jumped and beaten behind the school for his wallet. It's the price of living in peace, which has gone up exponentially since 1960.
I agree with your overall point, though I think your example of the girl getting slashed in the face is extraordinary and not the central point.
From what I can tell, bullying is still down. Growing up in the 1980s-90s in good school districts, no one was getting slashed in the face with razors, true, but I was still coming home with bruises and bloody noses from fights and sending other boys home with same. These days, this seems to be unheard of. Some of this might have to do with "zero tolerance", though I also suspect it's related to the more passive and over-monitored character of today's youth.
But we absolutely are trying to separate ourselves spatially from the lower classes, and it's costing us. This was a key point that Charles Murray made in "Coming Apart": that in your 1960 example, the company's CEO and its janitor might be sending their kids to the same public school; now they might live 60 minutes away from each other.
Why? I think "disorder" and "dysfunction" may be the key words. Broken families, drugs, etc. Classrooms where disruptive influences can't be properly punished and so chaos reigns.
Charles Lehman has been writing a series of posts about how disorder and crime aren't always the same thing (though to be clear, he's not discussing public schools). Over the last few years, crime is down but disorder is up.
They're all extraordinary, of course, until it happens to one's own kids. In the three years I lived in an Atlanta suburb, just in the schools within about ten miles, we had the razor incident, a student with a handgun in the high school bathroom making shooting threats on his phone, and an elderly English teacher beaten within an inch of her life. And those are the incidents I knew about. Most of it didn't make it out of local news. I didn't live in a "bad" area. The houses in my neighborhood were pushing half a million dollars. I paid more for my house for the very purpose of not having to deal with that kind of thing.
What I think Murray does well, and he doesn't get enough attention for this, is the way that the secession of the successful includes promoting the destruction of middle-class communities and the lumpenization of the working class. It's not just that the CEO leaves behind the old neighborhood; he also promotes what Rob Henderson calls luxury beliefs that actively degrade the old neighborhood and destroy the lower rungs of the ladder he climbed to get where he's going. I'm not saying that the Upper-Middle Class are intentionally destroying middle-class communities to sabotage the competition for society's rewards and benefits, but it's awfully convenient that their ideological commitments happen to devastate the communities of upwardly-mobile families who have the grit and determination to succeed that Mr. Upper-Middle Class's grandfather used to escape poverty himself and that his lazy and spoiled kids lack.
The decay in social capital is far greater than the decay in economic potential. I would argue that the decay in social capital is responsible for the decay in earnings capability.
For example, previous generations used to worry about the burden of government debt on future generations, and this was a huge factor in policy debates. Today, there is no such debate. Concern for posterity has gone out the window in today's culture. I think it is more a metric of how little we care for the young and how much the living generations only care for themselves.
Seriously, History will judge the Boomer generation harshly.
One of my weird theories of everything is that fiat money is a prime underminer of public morality. Artificially low interest rates reward the immoral, whose behavior is mimetically syndicated to the rest of society:
You note the peculiarity of housing prices going up faster than rent. Housing buyers are not just families who are currently renting, relocating, trading up, downsizing, etc. the homes they live in. A lot of the demand for housing is driven by investors purchasing residential real estate that they will not themselves live in. These investors are not just buying properties because of the income stream that they expect to generate from rents. They're also betting that the properties will appreciate in value (a good bet in recent years), and that they'll be able to make a profit when they or their heirs sell the properties in the future.
The solution to this would be a land value tax as advocated by Henry George in Progress and Poverty. Like you say, we also need "a monetary policy that cares less about the net worth of older asset owners." However, making these changes would be politically challenging, because older asset owners exercise great political influence, especially in an era of low birth rates and an upside-down population pyramid.
I'll agree that investor-owned single-family houses are a growing phenomenon, and I think Aaron pointed it out in a previous article. In the last 10-15 years, it has become much easier for institutional investors to manage large portfolios of single-family houses due to improvements in software and business processes, so this is a trend that will probably continue for the foreseeable future.
However, I don't think that renting out houses as primary residences leads to an increase in housing demand. You can only have one primary residence, after all, whether you own it or rent it.
What leads to an increase in housing demand in this case is people choosing to use houses for things other than living in them or renting them out as a primary residence. AirBnB is probably the biggest example. In the past, it was seldom worthwhile to try to do short-term rentals in your vacation home or as a pure small-time investor, but now it's easier than ever, and that can do a lot to defray the costs of maintaining a vacation home.
If you have investors (whether giant institutional investors or just well-off people looking to do something with that $250,000 inheritance they recently received) trying to purchase residential real estate, it increases demand and crowds out prospective owner-occupiers, like the recent college grads discussed in the article. At the same time, it increases the supply of rentals available. Hence, the phenomenon of housing prices increasing faster than rents.
We wouldn't necessarily expect this to mean higher overall costs for consumers, except that institutional investors are sophisticated and ruthless landlords that endeavor to extract away any possible consumer surplus (again, I recall Aaron making this point in his prior piece). There are of course ruthless smalltime landlords, but they're much less sophisticated so they'll still tend to lose out somehow, perhaps through having a lot more vacancies.
But in practice, I think a lot of individuals who rent out a spare house leave surplus on the table for their tenants. They might seek out a renter through their personal network, so the relationship is essentially friendly. And most smalltime landlords that do it as a side hustle don't want to invest too much time into it.
A friend who rents out a few spare houses has a policy of never raising rent on a tenant unless they're a problem, in which case he raises it aggressively in an effort to drive them out. He's had one tenant for 10 years.
What's odd about this is that the cap rates on single-family residential real estate investments aren't all that impressive, and the hassle factor is huge. One can own common stocks, mineral royalties or pipeline partnerships yielding much more.
A while back I owned shares in a publicly traded pipeline MLP. I was earning 14-17% in dividends, plus could deduct depletion. I said to myself, "This is too good to be true" so I sold. Later the company did end up going BK.
Yes, I think the cap rates on single-family real estate are ordinarily very low. I think that's why it requires buying fixer-uppers, including buying houses sight-unseen at auction. The owner-occupied housing market seems to carry an inefficiency in terms of the large discount it applies to houses that have needed repairs/renovations. But small-timers flipping houses (or buying fixer-uppers for rent) often screw up with a bad deal and find themselves underwater. I think a larger player has the potential to bring a more disciplined process and to be diversified enough to absorb losses.
But a lot of small-timers that we're talking about will do things like rent out their previous perfectly good home instead of selling it. In those cases, you could say they're holding real estate for diversification, but realistically they're usually just not very good investors and they like real estate because it's tangible and easy to understand while they regard stocks as intangible and complicated. Also they're often doing a lot of the labor themselves and not really factoring that into their math. But who knows, maybe they enjoy the labor to some extent, it's something different from their 9-5. Kind of like people who enjoy doing yard work. Or there's a SAHM that doesn't want an outside job but it gives her something to do.
Land with known and exploitable mineral deposits would be taxed at a value that reflected those deposits, whether those deposits were actually exploited or not.
Here's a real-world example of the problem. I live in a neighborhood with 50 nice but not extravagant 3- and 4-bedroom homes built about 40 years ago, on lots of approximately a quarter acre apiece. I pay $6,661.21 per year in property taxes, which is probably average for the neighborhood.
Immediately to the south of me, an investment group owns undeveloped (but buildable) acreage comparable to that occupied by the 50 homes in my neighborhood. The annual taxes on that acreage? $115.52.
All told, the government collects about $334,000 per year in property taxes from my neighborhood and the undeveloped acreage to the south.
The solution is to tax land values, not improvement values. If the government needs to collect $334,000 in taxes from this real estate, it should raise the taxes on the undeveloped but buildable land to $167,000 per year and lower the taxes on the 50 homeowners to something like $3,330.00 per year.
Right now, the investment group is holding onto the land to the south of me, but not developing it, since they figure it will be worth more in the future and the annual taxes are a pittance, easily covered by renting the land to a soybean farmer. With the taxes rebalanced as suggested above, the investment group would be forced to sell the land to a residential developer (or surrender it to the government in lieu of taxes), since it's unlikely the land would appreciate fast enough to make $167,000 per year in taxes worth paying. So approximately 50 more families would have a place to live, and those families (as well as the current owner-occupiers in my neighborhood) would see significant cuts to their property taxes versus the current scenario.
Excellent explanation. I find the argument plausible. My favorite investments are mineral royalties, which are treated unbelievably favorably. In Texas, which has notoriously high property taxes, royalty interests are only taxed when they are producing income, which means no cost to hold forever, which is why they are the best rent-seeking investments, and mineral owners (or their lessees) routinely damage the surface because they don't own it, which undermines one of the key benefits of private property, i.e. the care an owner gives to something he wholly possesses. In stripping out mineral rights, the mineral owner has perverse incentives and obscene profits, which is why I like them in my portfolio! In most countries, the sovereign retains all mineral rights, so it's appropriate they're called royalties. My native Louisiana, in the Huey Long era, passed a law limiting retained non-producing mineral rights to 10 years. A similar reform would help re-unify private property incentives in Texas, but in the meantime, I'll keep collecting my juicy rents.
This is interesting. I've inherited some decades-old coal rights underneath a distant cousin's farm that are unlikely to be exploited in the foreseeable future, which I value at approximately zero. But every now and then I wonder if I'm wrong, and if I should be doing something with them.
One minor quibble:
You wrote: "High interest rates are a boon to the frugal and virtuous and punish the profligate and foolish."
In a society where things like housing and cars didn't have such a high price compared to wages, I would agree with you. However, as matters stand, high interest rates serve to price out those who want to be frugal and virtuous but have limited means and to preserve the wealth of the profligate and foolish who are well-off.
Good point, a better way to clarify would be to say "at equilibrium." We're at a weird non-equilibrium state where higher interest rates have not done much to lower asset prices as economic theory usually predicts.
Very interesting piece and touched on many areas I have thought about - I think the short answer is 'yes, but will require compromises past generations didn't have to make.'
On one hand there is immense pressure to consume and it is easily spread through mobile devices and social media, which is a totally different landscape than I faced (apparently I am the same age as Mr. Owens). Education, cars, where one lives and the lifestyle you lead are all supercharged by non-stop messaging that most feel hard to resist. One obvious example as noted in the post is the cost of a new vehicle. If you want a minivan or SUV appropriate for a family, a new base non-luxury model starts at $40K now and easily surpasses $50K for some options - and tellingly, if you peruse one of the manufacturer's website the default financing option is just a couple grand down with a 72 month term loan. Obviously if that's what makes this purchase within reach you cannot really afford it, and yet I see plenty of late model cars on the road.
The other great point in the comments is about increasing social disorder and what you have to do to escape it, which primarily concerns where your home is located and what your options are for school. For a truly middle class income, this is going to generally means some significant tradeoffs in terms of how close you are to amenities, work, etc. and what you have to put up with daily as a result. I live in a nice city neighborhood near where I grew up, and when I was a kid most of us walked to the nearest public school. Nowadays the percentage of families that send their kids to private school is up quite a bit and many of the rest attempt to get their kids into more distant but orderly public schools so you don't see many walking to and from at all. My childhood offered a bit more neighborhood cohesion as a result, whereas today on just my block the various kids go to 5 different public or private schools.
"The only explanation that makes sense for housing is a secular change in demand exceeding supply’s ability to compensate, and the explanation for that is the massive immigration of the Biden administration."
In Virginia's comment below, she points to other explanations here. It seems likely that the significant increase in housing cost is multi-causal, not mono-causal. I would need to see the data to believe that THE explanation was immigration.
But the broader point stands. Supply and demand. So, the solution: build, baby, build.
I live in a small city with slow population growth and plenty of buildable land. There's a lot of new residential construction going on now, and has been for as long as I can remember. Yet housing prices have still more than doubled in the last twelve years. I couldn't figure that out until I realized that "demand" is not the number of families looking to buy a house; it's the amount of money that people (including investors) are looking to spend on residential real estate. So demand for housing has grown significantly, even though population has barely risen at all.
One of the biggest errors being made in these kinds of generational comparisons is the true equivalence of these goods across time. Some of those equivalences are not quantitative. The equivalent to a 1960 house is not just a question of square footage or appliances, but also the house being in a neighborhood with the 1960 equivalent crime rate in a school district with a 1960 equivalent public school.
Let me use a personal example. When I taught in the Atlanta area, we paid a premium on our house to live in the "good" school district in our county. Our last year there, a 7th grade girl in my son's PE class got her face slashed up with a razor by another girl who thought the first girl was looking at her boyfriend. The real question becomes this - if girls are getting their faces cut with razors in the "good" school and girls were not getting their faces slashed with razors in a 1960 school, then these schools are not actually equivalent. The best school in the county is actually worse today than the median (or maybe even worst) school in 1960. If you want to truly find the equivalent in terms of quality of life, you have to determine how much more it would cost to live in a place where girls don't get their faces slashed with razor blades in the local school. That generally means that you have to add the cost of private education to the cost of living to calculate an equivalent to 1960 education.
We could do the same with crime rate in general. If you want to find the equivalent value of a house, you need to control for the crime rate. How much does it cost to buy a starter home in a neighborhood where the crime rate is the same as the median crime rate in 1960? The shrinkage of neighborhoods that have a safety equivalent to 1960 shows that the "official" data is off base. The equivalence is about quality of life, not abstract notions like price per square foot.
The reality is that ballooning social dysfunction drives up the real cost of living for middle-class folks who do not want to live amidst violence, squalor, and degrading public services. The question is not "how much is it to buy a basket of market goods." The real question is "how much do I have to pay to avoid the social dysfunction that the government incentivizes in formerly middle-class communities." Matching our parents' lifestyle is not so much about the car or the house. It's about making sure my daughter isn't the next girl to get her face slashed by a jealous 12-year-old with a razor blade. It's about making sure my son doesn't get jumped and beaten behind the school for his wallet. It's the price of living in peace, which has gone up exponentially since 1960.
I agree with your overall point, though I think your example of the girl getting slashed in the face is extraordinary and not the central point.
From what I can tell, bullying is still down. Growing up in the 1980s-90s in good school districts, no one was getting slashed in the face with razors, true, but I was still coming home with bruises and bloody noses from fights and sending other boys home with same. These days, this seems to be unheard of. Some of this might have to do with "zero tolerance", though I also suspect it's related to the more passive and over-monitored character of today's youth.
But we absolutely are trying to separate ourselves spatially from the lower classes, and it's costing us. This was a key point that Charles Murray made in "Coming Apart": that in your 1960 example, the company's CEO and its janitor might be sending their kids to the same public school; now they might live 60 minutes away from each other.
Why? I think "disorder" and "dysfunction" may be the key words. Broken families, drugs, etc. Classrooms where disruptive influences can't be properly punished and so chaos reigns.
Charles Lehman has been writing a series of posts about how disorder and crime aren't always the same thing (though to be clear, he's not discussing public schools). Over the last few years, crime is down but disorder is up.
E.g. here:
https://substack.com/home/post/p-152140500
They're all extraordinary, of course, until it happens to one's own kids. In the three years I lived in an Atlanta suburb, just in the schools within about ten miles, we had the razor incident, a student with a handgun in the high school bathroom making shooting threats on his phone, and an elderly English teacher beaten within an inch of her life. And those are the incidents I knew about. Most of it didn't make it out of local news. I didn't live in a "bad" area. The houses in my neighborhood were pushing half a million dollars. I paid more for my house for the very purpose of not having to deal with that kind of thing.
What I think Murray does well, and he doesn't get enough attention for this, is the way that the secession of the successful includes promoting the destruction of middle-class communities and the lumpenization of the working class. It's not just that the CEO leaves behind the old neighborhood; he also promotes what Rob Henderson calls luxury beliefs that actively degrade the old neighborhood and destroy the lower rungs of the ladder he climbed to get where he's going. I'm not saying that the Upper-Middle Class are intentionally destroying middle-class communities to sabotage the competition for society's rewards and benefits, but it's awfully convenient that their ideological commitments happen to devastate the communities of upwardly-mobile families who have the grit and determination to succeed that Mr. Upper-Middle Class's grandfather used to escape poverty himself and that his lazy and spoiled kids lack.
This is a great point that strengthens the argument. So many hidden costs in a morally degenerating society...
The decay in social capital is far greater than the decay in economic potential. I would argue that the decay in social capital is responsible for the decay in earnings capability.
For example, previous generations used to worry about the burden of government debt on future generations, and this was a huge factor in policy debates. Today, there is no such debate. Concern for posterity has gone out the window in today's culture. I think it is more a metric of how little we care for the young and how much the living generations only care for themselves.
Seriously, History will judge the Boomer generation harshly.
One of my weird theories of everything is that fiat money is a prime underminer of public morality. Artificially low interest rates reward the immoral, whose behavior is mimetically syndicated to the rest of society:
https://tomowens.substack.com/p/book-review-the-price-of-time-by
You note the peculiarity of housing prices going up faster than rent. Housing buyers are not just families who are currently renting, relocating, trading up, downsizing, etc. the homes they live in. A lot of the demand for housing is driven by investors purchasing residential real estate that they will not themselves live in. These investors are not just buying properties because of the income stream that they expect to generate from rents. They're also betting that the properties will appreciate in value (a good bet in recent years), and that they'll be able to make a profit when they or their heirs sell the properties in the future.
The solution to this would be a land value tax as advocated by Henry George in Progress and Poverty. Like you say, we also need "a monetary policy that cares less about the net worth of older asset owners." However, making these changes would be politically challenging, because older asset owners exercise great political influence, especially in an era of low birth rates and an upside-down population pyramid.
I'll agree that investor-owned single-family houses are a growing phenomenon, and I think Aaron pointed it out in a previous article. In the last 10-15 years, it has become much easier for institutional investors to manage large portfolios of single-family houses due to improvements in software and business processes, so this is a trend that will probably continue for the foreseeable future.
However, I don't think that renting out houses as primary residences leads to an increase in housing demand. You can only have one primary residence, after all, whether you own it or rent it.
What leads to an increase in housing demand in this case is people choosing to use houses for things other than living in them or renting them out as a primary residence. AirBnB is probably the biggest example. In the past, it was seldom worthwhile to try to do short-term rentals in your vacation home or as a pure small-time investor, but now it's easier than ever, and that can do a lot to defray the costs of maintaining a vacation home.
If you have investors (whether giant institutional investors or just well-off people looking to do something with that $250,000 inheritance they recently received) trying to purchase residential real estate, it increases demand and crowds out prospective owner-occupiers, like the recent college grads discussed in the article. At the same time, it increases the supply of rentals available. Hence, the phenomenon of housing prices increasing faster than rents.
Alright, I can agree that this is valid logic.
We wouldn't necessarily expect this to mean higher overall costs for consumers, except that institutional investors are sophisticated and ruthless landlords that endeavor to extract away any possible consumer surplus (again, I recall Aaron making this point in his prior piece). There are of course ruthless smalltime landlords, but they're much less sophisticated so they'll still tend to lose out somehow, perhaps through having a lot more vacancies.
But in practice, I think a lot of individuals who rent out a spare house leave surplus on the table for their tenants. They might seek out a renter through their personal network, so the relationship is essentially friendly. And most smalltime landlords that do it as a side hustle don't want to invest too much time into it.
A friend who rents out a few spare houses has a policy of never raising rent on a tenant unless they're a problem, in which case he raises it aggressively in an effort to drive them out. He's had one tenant for 10 years.
What's odd about this is that the cap rates on single-family residential real estate investments aren't all that impressive, and the hassle factor is huge. One can own common stocks, mineral royalties or pipeline partnerships yielding much more.
A while back I owned shares in a publicly traded pipeline MLP. I was earning 14-17% in dividends, plus could deduct depletion. I said to myself, "This is too good to be true" so I sold. Later the company did end up going BK.
Yes, I think the cap rates on single-family real estate are ordinarily very low. I think that's why it requires buying fixer-uppers, including buying houses sight-unseen at auction. The owner-occupied housing market seems to carry an inefficiency in terms of the large discount it applies to houses that have needed repairs/renovations. But small-timers flipping houses (or buying fixer-uppers for rent) often screw up with a bad deal and find themselves underwater. I think a larger player has the potential to bring a more disciplined process and to be diversified enough to absorb losses.
But a lot of small-timers that we're talking about will do things like rent out their previous perfectly good home instead of selling it. In those cases, you could say they're holding real estate for diversification, but realistically they're usually just not very good investors and they like real estate because it's tangible and easy to understand while they regard stocks as intangible and complicated. Also they're often doing a lot of the labor themselves and not really factoring that into their math. But who knows, maybe they enjoy the labor to some extent, it's something different from their 9-5. Kind of like people who enjoy doing yard work. Or there's a SAHM that doesn't want an outside job but it gives her something to do.
Also easy to borrow money on real estate which juices yields as long as rents don't drop.
Georgism is an interesting idea. Not sure how it would account for the value of minerals...
Land with known and exploitable mineral deposits would be taxed at a value that reflected those deposits, whether those deposits were actually exploited or not.
Here's a real-world example of the problem. I live in a neighborhood with 50 nice but not extravagant 3- and 4-bedroom homes built about 40 years ago, on lots of approximately a quarter acre apiece. I pay $6,661.21 per year in property taxes, which is probably average for the neighborhood.
Immediately to the south of me, an investment group owns undeveloped (but buildable) acreage comparable to that occupied by the 50 homes in my neighborhood. The annual taxes on that acreage? $115.52.
All told, the government collects about $334,000 per year in property taxes from my neighborhood and the undeveloped acreage to the south.
The solution is to tax land values, not improvement values. If the government needs to collect $334,000 in taxes from this real estate, it should raise the taxes on the undeveloped but buildable land to $167,000 per year and lower the taxes on the 50 homeowners to something like $3,330.00 per year.
Right now, the investment group is holding onto the land to the south of me, but not developing it, since they figure it will be worth more in the future and the annual taxes are a pittance, easily covered by renting the land to a soybean farmer. With the taxes rebalanced as suggested above, the investment group would be forced to sell the land to a residential developer (or surrender it to the government in lieu of taxes), since it's unlikely the land would appreciate fast enough to make $167,000 per year in taxes worth paying. So approximately 50 more families would have a place to live, and those families (as well as the current owner-occupiers in my neighborhood) would see significant cuts to their property taxes versus the current scenario.
Right now, the
Excellent explanation. I find the argument plausible. My favorite investments are mineral royalties, which are treated unbelievably favorably. In Texas, which has notoriously high property taxes, royalty interests are only taxed when they are producing income, which means no cost to hold forever, which is why they are the best rent-seeking investments, and mineral owners (or their lessees) routinely damage the surface because they don't own it, which undermines one of the key benefits of private property, i.e. the care an owner gives to something he wholly possesses. In stripping out mineral rights, the mineral owner has perverse incentives and obscene profits, which is why I like them in my portfolio! In most countries, the sovereign retains all mineral rights, so it's appropriate they're called royalties. My native Louisiana, in the Huey Long era, passed a law limiting retained non-producing mineral rights to 10 years. A similar reform would help re-unify private property incentives in Texas, but in the meantime, I'll keep collecting my juicy rents.
This is interesting. I've inherited some decades-old coal rights underneath a distant cousin's farm that are unlikely to be exploited in the foreseeable future, which I value at approximately zero. But every now and then I wonder if I'm wrong, and if I should be doing something with them.