Rethinking the Economics of Land and Housing

By Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane

Zed Books Ltd

Copyright © 2017 Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane
All rights reserved.
ISBN: 978-1-78699-118-8

Contents

Figures, tables and boxes,
Acknowledgements,
Abbreviations,
Glossary,
Foreword by John Muellbauer,
1 Introduction,
2 Landownership and property,
3 The missing factor: land in production and distribution,
4 Land for housing: land economics in the modern era,
5 The financialisation of land and housing,
6 Land, wealth and inequality,
7 Putting land back into economics and policy,
Bibliography,
Index,

CHAPTER 1

Introduction

Buy land – they're not making it anymore.

MARK TWAIN (ATTRIBUTED)

Attention salesmen, sales managers: location, location, location, close to Rogers Park.

1926 REAL ESTATE CLASSIFIED AD IN THE Chicago Tribune, in Safire (2009)

This is a book about land and its role in the economy. By land we don't mean physical earth and rock, we mean locational space. Land plays a central role in the economy but one that is often overlooked and poorly understood. This lack of understanding is a major weakness in much orthodox economic thinking, and helps to explain many of the policy failures and problems that bedevil modern societies. These include the crisis in the affordability of housing (the main use for land in modern economies), rising inequality, financial instability, excessive household debt and falling investment and productivity levels, despite increasing paper wealth.

This book should help the reader understand how these problems came about and provide some clues as to how they might be addressed in the future. The book has two sets of audiences and objectives. Firstly, it is aimed at the interested reader who wishes to better understand some of the challenges facing modern economies and societies. These questions include:

• Why are house prices in advanced economies rising faster than incomes and the growth of the economy? Is it simply a case of building more homes or having fewer people? Why don't politicians or policy makers want or allow house prices to fall?

• Why is landownership so concentrated and wealth inequality growing so fast?

• Is it desirable for society to aspire to home- and landownership as the best route to wealth?

• What is the relationship between the financial system and land? Why have banks begun to lend more for the purchase of existing property and land than to businesses for investment? Why are household debt levels historically so high?

• What is the cause of the large boom and bust cycles in house prices experienced in the UK and other countries over the last forty-five years?

• How does the value of land relate to the technologies of production, the distribution of wealth and economic inequality over time?

• Why isn't land and location taught or seen as important in modern economics or integrated into national accounting?

Secondly, this book is aimed at students and academics in the social sciences, including politics, political economy, law, sociology, geography, urban studies and, perhaps most of all, economics, where the topic of land has almost completely disappeared from most textbooks. To understand land properly, we must take a cross-disciplinary approach – we need a bit of history, a bit of economics and a bit about power and the law.

This book is focused on the macroeconomics and political economy of land – in other words, how it impacts on aggregate or national economic phenomena, such as the distribution of wealth and income, changes in asset prices, flows of credit and stocks of debt, and, for the most part, the national rather than international or local/regional policy and political sphere. A particular goal is to help develop a more coherent analysis of the role of 'economic rent' in modern economies: that is, the excess returns derived from the ownership of a natural (usually scarce) resource. Land, we believe, is the most important source of such rents in advanced economies and also the most neglected. The book is motivated by the failure of mainstream macroeconomics to develop theories adequate to explaining these dynamics. This has been a long-term problem andwe are not the first to tackle it, but it is one that has been brought into particularly sharp definition in the post-financial crisis period since 2007–8.

This book does not examine the economics of cities or urban space more generally, or the role of land in agricultural or development economics settings. These are fields which we felt were already well covered in the existing literatures. The focus of the book is also primarily on the use of land as housing rather than commercial real estate, although the latter is discussed in a number of places. Similar dynamics apply to both, but there are important differences that space has not allowed us to examine.

The economic story of land is global, and much of the evidence and arguments presented in this book are relevant to advanced economies generally. But the way in which land's role in the economy has played out in different places depends largely on the laws, institutions and political history of particular nations, and so varies widely. Rather than attempt to comprehensively cover the world – an endeavour that would have required a book six times the length of this one – we mainly focus on the United Kingdom as our case study. The UK is a large and mature economy, and many aspects of its land economy, legal institutions and financial system have been exported around the world (particularly to Anglo-Saxon, common law countries), making it a useful reference point for more generalised discussion of the issues. But throughout the book we also incorporate examples of the role of land in other advanced countries.

1.1 What is land?

In classical political economy (the predecessor to modern economics), land was understood to be one of the three factors of production, along with capital and labour. Any economic activity requires the combination of all three: a farm obviously requires land to produce food, but so too does a factory to produce goods, or a lawyer's office to provide legal services. Looked at like this, it is clear that land is not simply soil, and its economic uses are not simply agricultural. In fact, land is better understood as space and the occupation of that space over time.

Throughout most of economic history the primary function of land was for agricultural production. But since the birth of modern, capitalist economies other uses have become predominant: first as the site of industrial production, and later as the site of service provision and domestic housing. Today, it is in the housing market that the economic function of land is most visible, as the value of residential property has overtaken the value of land used for other purposes, as the economist Thomas Piketty (2014) makes clear in his recent book Capital in the Twenty-First Century. For this reason, much of the book focuses on housing as the main economic use of land.

Land has several unique features that differentiate it from the other 'factors of production' that form the central focus of the economics discipline: capital and labour. Most obviously land is immobile: you can't move land from one place to another, because land is the place itself. The supply...