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Deflating House Price Bubbles

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Jon Southall

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According to this article, there is a realisation that property tax rises can be used to dampen the effects of house price inflation:

http://mobile.abc.net.au/news/2016-11-11/property-tax-rise-could-reduce-house-price-booms-and-busts/8018790

I disagree with this article because it is not precise. In application, a "property" tax applies to the value of land and the value of property. To the extent it falls on land value alone, the tax will reduce the likelihood of house price booms, but the efficacy will depend on the tax rate relative to the value of land.

A fixed property tax rate for example may reduce house price inflation in Medway but have no real impact in London, because the relative value of land is unequal.

The problem with a property tax is that it is too indiscriminate. If they tax just the land value, there will be no adverse economic impacts and indeed it will reduce house price inflation. They need to isolate that the tax needs to be less than or equal to the economic rent in order to have its desired effect.

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As an Architect, who's firm was deeply embedded in the multi-family (condo) housing boom-to-bust market (2003-2008) my take on the issue is that residential prices continued to increase because the QUANTITY of money in circulation increased.

We were putting up condominiums in Portland and Seattle as fast as we could (and so was everyone else).  So why did the prices continue to increase?  Doesn't an increase in Supply reduce Demand, and prices?

In a free market, yes.  But the U.S. Government was in the process of waging two wars and, after 9/11, pumping huge amounts of printed money into the economy while simultaneously guaranteeing mortgages to very risky applicants in order to "stimulate" the economy.

I'm not sure how things work across the "pond", but this is what led to the 2008 collapse of the economy in the U.S. 

Edited by New Buddha
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Certainly the explosion of mortgage lending injected a lot of money into economy and helped fuel it. 

Of course increasing the supply ought to reduce prices, but that assumes there aren't also shifts in demand that are pushing prices back up. Certainly changes in lending criteria unleashed additional demand.

I doubt the cost of building condominiums rose significantly in the run up to the bubble bursting, but the land value did. Economic rents were therefore rising. This drove up poverty and undermined entrepreneurism to the extent there was a massive recession.

George's relationship is:

1. Production = Labour + Capital + Land

2. Wealth = Wages + Interest + Economic Rent

3. Wealth - Economic Rent = Wages + Interest.

As economic rents rose, it necessarily reduced the share of production which is enjoyed by workers and entrepreneurs - despite the truth that all production was a consequence of them. When interest (meaning here return to capital) and wages moved towards  levels of subsistence living or below, economic activity started to collapse. 

A land value tax diminishes the demand for economic rents, consequently land value increases won't be fuelled by customers having a greater disposable income.

The existence of a land value tax doesn't mean the house prices would not have had a tendency to rise under increasing demand, but it would have reduced the costs faced by property developers as well as incentivising rapid development and land use optimisation. Also those developers would have retained more of the revenues from putting up condos.

Under a free market this would have attracted more developers to supply more, so meeting rising demand without prices becoming unaffordable for home buyers or developers alike.

The land value tax has to hit as much of the economic rents as possible but without taxing any property.

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