6 ms·

"The real problem with land [and property taxes] is the fact it tends to flow into the cost of rent and homeownership." The price of property and rent in popul

by air 11y ago

"The real problem with land [and property taxes] is the fact it tends to flow into the cost of rent and homeownership." The price of property and rent in popular places will be what the market will bear. So with tax, the rent would stay the same. Price of apartments would go down, because buyers need to pay the tax, so they cannot afford as much. Apartments in space efficient towers would be grow in value relatively, because they don't need to pay so much tax, so there would be incentive to build more densely. This means more apartments and cheaper prices.

fweespeech 11y ago
> The price of property and rent in popular places will be what the market will bear. So with tax, the rent would stay the same. Price of apartments would go down, because buyers need to pay the tax, so they cannot afford as much. You are ignoring that capital flows to the most efficient RoI it can find. If rents remained the same, the RoI would drop [due to the tax increase] and it would lead to land abandonment. Land abandonment is one of the largest practical issues with a land value tax. Increasing housing density isn't efficient when the practical value of the land is low. Yes, it'd be great in SF. But what about Athens, GA? It'd be a terrible idea there. Building upwards isn't free, either. Yes, its popular with a certain class of economist who makes certain assumptions but the real world behavior of landlords isn't what you think it is. ------ Let us say, for the sake of argument, that you are correct. $800 rent, tax burden increased by $600 a year. So everyone unloads their real estate holdings because they are no longer profitable. Prices of land plummet as its abandoned as unprofitable, reducing tax revenue. If you build alot of high density housing, you need less land, so as such housing finishes...everywhere that is "far" from the new high density area drops in value again. The cycle repeats until the new normal is stable. You've suddenly restructured every major city in the affected area. However, you've created so much abandoned land that is converted to farming that your tax revenues have dropped. So you have to raise taxes, the cycle repeats.
- tormeh 11y ago
  A land tax depends on the value of the land. In areas without congestion, the value of land is low, so the land tax will be low and thus there will be no problem.
- breischl 11y ago
  You're assuming that the tax is so onerous as to make rental housing unprofitable. Not just less profitable, but a flat-out cash drain. That's a pretty big assumption. If you assume that it just captures a fraction of the profit, then the existing stock would remain, because it's still profitable. New build rentals would be affected, and would probably push towards more land-efficient form factors. Take your example, with the added assumption that the landlord is netting out $200/mo after expenses, repairs, vacancy, etc. If the land tax was 100/mo, he'd still be taking home $100/mo. ROI is cut in half, but it's still positive, so it will probably stay a rental. Certainly some of the marginal units will get turned into for-sale housing, but not all of them, and probably none would be abandoned.
  - fweespeech 11y ago
    > You're assuming that the tax is so onerous as to make rental housing unprofitable. Not just less profitable, but a flat-out cash drain. That's a pretty big assumption Many, many landlords in this country are single property landlords or landlords that own a small number of "single family homes" [1-4 unit homes]. The gross cash flow of such properties is ~1% of the property value in cash flow. A 1% property tax equivalent increase wipes out all cashflow and guarantees an overall negative return given real estate stays about even with inflation, barring bubbles/speculation. However, the positive per-unit cashflow is about $100/month/unit in the real world if you picked a good investment. $100. You raise the tax burden by $1200/year/unit, the unit is worthless and must be sold. Pretty much all "land value tax" proposals require that much of an increase as they replace other revenue streams. > ROI is cut in half You've basically admitted the problem. If you cut ROI in half, you are better off investing in the market. Real estate investing is very, very narrow in its advantage over other forms of investment [if you are good at it and can find good deals] to the tune of fractions of a percentage point. Perhaps as much as a whole percentage point. If this wasn't the case, everyone would plow their money into real estate instead of stocks/bonds/etc.
    - breischl 11y ago
      Many consider the "1% Rule" as the minimum bar. You're probably right that there are a lot rentals around that level, but those are the marginal rentals that I mentioned would likely become for-sale housing. Also, since you define the tax increase as 1% of property value, then your math is correct. But I believe the proposition is to charge it on the value of the land, not including the value of the improvements, which is typically a much lower number. For single family homes it would still be a hit, but not as severe as your math indicates. For higher density developments it would be even less onerous - which is pretty much the point. Tangentially, I believe your estimate on ROI from rentals is inaccurate. Long term average stock returns are in the range of 7%, it's not uncommon to find rentals about 10%. As they should be, given the illiquidity, lack of diversification, various extra risks, and the work involved. All of which explains why stocks are more popular.

by air 11y ago

fweespeech 11y ago

> The price of property and rent in popular places will be what the market will bear. So with tax, the rent would stay the same. Price of apartments would go down, because buyers need to pay the tax, so they cannot afford as much. You are ignoring that capital flows to the most efficient RoI it can find. If rents remained the same, the RoI would drop [due to the tax increase] and it would lead to land abandonment. Land abandonment is one of the largest practical issues with a land value tax. Increasing housing density isn't efficient when the practical value of the land is low. Yes, it'd be great in SF. But what about Athens, GA? It'd be a terrible idea there. Building upwards isn't free, either. Yes, its popular with a certain class of economist who makes certain assumptions but the real world behavior of landlords isn't what you think it is. ------ Let us say, for the sake of argument, that you are correct. $800 rent, tax burden increased by $600 a year. So everyone unloads their real estate holdings because they are no longer profitable. Prices of land plummet as its abandoned as unprofitable, reducing tax revenue. If you build alot of high density housing, you need less land, so as such housing finishes...everywhere that is "far" from the new high density area drops in value again. The cycle repeats until the new normal is stable. You've suddenly restructured every major city in the affected area. However, you've created so much abandoned land that is converted to farming that your tax revenues have dropped. So you have to raise taxes, the cycle repeats.

tormeh 11y ago
A land tax depends on the value of the land. In areas without congestion, the value of land is low, so the land tax will be low and thus there will be no problem.
breischl 11y ago
You're assuming that the tax is so onerous as to make rental housing unprofitable. Not just less profitable, but a flat-out cash drain. That's a pretty big assumption. If you assume that it just captures a fraction of the profit, then the existing stock would remain, because it's still profitable. New build rentals would be affected, and would probably push towards more land-efficient form factors. Take your example, with the added assumption that the landlord is netting out $200/mo after expenses, repairs, vacancy, etc. If the land tax was 100/mo, he'd still be taking home $100/mo. ROI is cut in half, but it's still positive, so it will probably stay a rental. Certainly some of the marginal units will get turned into for-sale housing, but not all of them, and probably none would be abandoned.
- fweespeech 11y ago
  > You're assuming that the tax is so onerous as to make rental housing unprofitable. Not just less profitable, but a flat-out cash drain. That's a pretty big assumption Many, many landlords in this country are single property landlords or landlords that own a small number of "single family homes" [1-4 unit homes]. The gross cash flow of such properties is ~1% of the property value in cash flow. A 1% property tax equivalent increase wipes out all cashflow and guarantees an overall negative return given real estate stays about even with inflation, barring bubbles/speculation. However, the positive per-unit cashflow is about $100/month/unit in the real world if you picked a good investment. $100. You raise the tax burden by $1200/year/unit, the unit is worthless and must be sold. Pretty much all "land value tax" proposals require that much of an increase as they replace other revenue streams. > ROI is cut in half You've basically admitted the problem. If you cut ROI in half, you are better off investing in the market. Real estate investing is very, very narrow in its advantage over other forms of investment [if you are good at it and can find good deals] to the tune of fractions of a percentage point. Perhaps as much as a whole percentage point. If this wasn't the case, everyone would plow their money into real estate instead of stocks/bonds/etc.
  - breischl 11y ago
    Many consider the "1% Rule" as the minimum bar. You're probably right that there are a lot rentals around that level, but those are the marginal rentals that I mentioned would likely become for-sale housing. Also, since you define the tax increase as 1% of property value, then your math is correct. But I believe the proposition is to charge it on the value of the land, not including the value of the improvements, which is typically a much lower number. For single family homes it would still be a hit, but not as severe as your math indicates. For higher density developments it would be even less onerous - which is pretty much the point. Tangentially, I believe your estimate on ROI from rentals is inaccurate. Long term average stock returns are in the range of 7%, it's not uncommon to find rentals about 10%. As they should be, given the illiquidity, lack of diversification, various extra risks, and the work involved. All of which explains why stocks are more popular.