Can I suggest incorporating the better land price data from Knoll et al (2017), rather than quote Foldvary (2008). We readers can’t tell the scale of the level changes occurring over the 1800s to now from the table from Foldvary.
Knoll et al find average real land prices (I believe this is for urban land) across 11 countries collapsed from about 1897 until a minimum in 1942 and didn’t start ballooning until the late 1980s. I agree with your observation the decline resulted from urban expansion and the elevator increasing effective land supply; I’d add globalization (including global trade and travel, telecommunications supporting dispersion).
Knoll, Katharina, Moritz Schularick, and Thomas Steger. 2017. "No Price Like Home: Global House Prices, 1870-2012." American Economic Review 107 (2): 331–53.
What’s needed to get more traction on this issue is to further develop an economic theory that integrates back to existing economic theories. It needs to explain why now is like the 1800s, and why the 1900s was so different.
We’ve been developing such a theory in the New Zealand government. (I was leading it at the NZ Treasury.) We call it ‘uncompetitive urban land markets’, and it underpins reforms to our urban planning system, the way our fiscal and monetary policy agencies forecast house prices now, the methods we use to analyse housing tax policy etc. Both sides of our legislature has adopted it. We're ahead of the published urban economics literature though, which is frustrating.
The concept is that urban land prices are prone to investment speculation when there are systemic barriers to competitively converting cheap non-urban land to urban uses. High land prices at urban fringes lift land prices in city interiors. Barriers include regulation (growth boundaries, zoning, banning leap-frogging etc), restricted infrastructure supply (roads, waters, schools etc, because “revenue bond financing” stopped everywhere except in the USA), lack of forward planning (to minimize supply costs), local governments not disciplined by Tiebout competition, etc.
However, there are feedbacks that sustain this dynamic, so it doesn’t pop like a typical bubble. The rate of city-wide housing supply slows, raising the cost of renting housing, and land is used more intensively, all of which raises the annual cashflow of land rents. So it can look like a market with 'fair sustained pricing based on fundamentals'. Also, there can still be sustained rate of housing supply even with uncompetitive urban land markets and large extractive land rents.
Ironically, these supply barriers arose in the capitalist economic reforms around the world in the 1980s and 90s. Although, only about a third of US metros suffer these constraints; half are static or in decline (low productivity &/or amenity), and 20% are cheap and growing very fast (eg, the sunbelt).
In the scheme of things it’s not too hard to fix these barriers; the issue more is in awareness of the need for change. LVT would help, especially to help fund local public goods and infrastructure, and to support competing local governments. But getting competitive urban land supply is more important. Relying on governments to socialize these extractive land rents (such as through LVT or by local governments selling new land at extractive prices) instead incentivizes governments to promote higher land rents with which to tax/profit from. China’s whole economy is struggling with this now.
I agree these dynamics create systemic economic instability. It’s more like an extreme boom-bust cycle than the sine-wave-like business cycles taught in macroeconomics. It requires very active macroprudential policy (ie, on bank lending), and undermines politically-independent monetary policy for price stability because there are huge wealth transfers when interest rates change. I couldn’t say if it’s 18-year cycles, but I’d look more at the 1800s experience than current experience nowadays. If that suggests 18 years, it's perhaps a useful prior.
Hi Chris, and thank you so much for this helpful comment!
I am currently traveling so could only glance at Knoll et al, but it looks really intriguing and I look forward to a closer look!
You make a really good point in focusing on zoning and permissions. I find it very plausible that these impose very real restrains on the housing supply, thereby further increasing bubble behavior. I tend to see YIMBY-style reforms and LVT as fundamentally complementary, one addressing the permission side and the other the incentive side in development.
It is interesting that these regulations materialized in the 1980s and 1990s, but I wonder how they relate to the 19th century pattern? I don't know the economic history well enough to know if such regulations was a major factor then, or if it was more driven by land values independently of regulation.
It is also very interesting to hear about your experiences in NZ government. Is the bipartisan agreement mostly regarding analysis of the issue, or do you also have widespread agreement regarding the policy responses to contain it? I've heard good things about the Georgist community in NZ, and I'd love to know more!
(I forgot to add banking liberalisation for mortgage lending in the 1980s/early 90s helped fuel land market speculation if supply wasn't responsive.)
You're asking how did those supply factors I mention apply differently in the late 1800s and most of the 1900s? Specifically zoning/permissions, infrastructure, corridor planning?
For zoning/permissions, William Fischel's 2015 book "Zoning Rules!" is great for documenting how public zoning developed in the 1900s because the private law tort of nuisance got overwhelmed with the scale of urban expansion. He then outlines his "homevoter hypothesis" that homeowners use zoning to limit risks to house price reductions that dominate their investment portfolios. I think this helps explain limits to upzoning and intensifying existing areas but doesn't explain limits to urban expansion; I'll come back to this.
Re historic infrastructure supply, I've only studied NZ sorry. Our local governments (LGs) only used "revenue bond finance" funded from special pledged land/property taxes authorised by special local elections until the late 1900s. They were infrastructure juggernauts in the early 1900s. It was a very devolved system, because centralised systems were so inferior back then. Then we flipped to tax-backed (general obligations) debt only between 1989-1995, which is much more limited in comparison. Standard & Poor's US-based staff tell me the USA is the only country left whose LGs can issue both revenue bonds and GO bonds with independent credit ratings. (In all other countries the LGs are assumed to step up and bail out subordinate debts, so it all gets treated like GO debt by the ratings agencies anyway.) Our bond markets are very shallow now, so there's a chicken-egg problem trying to restore revenue bonds. And there's no literature on this issue, so no one cares nor knows. So, again, the bigger challenge is public awareness.
Re limiting urban expansion that emerged in recent decades (eg 'Smart Growth'), this seems driven by concerns about environmental sustainability and LG fiscal sustainability. These weren't concerns in the olden days. I presume environmental issues hadn't compounded yet. I presume elsewhere too that LGs were more fiscally sustained by being smaller with special funding/financing structures rather than general taxing (with minimal barriers to new special purpose LGs being created). (We in NZ idiotically banned all special purpose LG in 1989.)
Re major corridor planning, we in NZ stopped in the 1980s in our 'New Public Management' reforms to have governments step back and not crowd out markets. But more recently Solly Angel (book "Planet of Cities") and Alain Bertaud (book "Order Without Design") argue this is a primary role of governments, so we're trying to restore it. Places like Houston still do it with their Major Thoroughfare & Freeway Plan (MTFP), which is impressive.
Re NZ's bipartisan agreement, yes they relate to the issues and the policy responses. Although, that can always change. Two sources about the development of our bipartisan agreement are:
- Eleanor West (2024) "Up-zoning New Zealand: the localisation of a globally mobile policy idea"
- a new 3-part podcast series hosted on the NZ Initiative "Podcast: Housing Affordability: NZ at the Global Policy frontier, which I helped make. (Part 3 with the current Minister Chris Bishop will be released next week hopefully.)
Yep, interest in Georgism is certainly growing here ;)
Thanks Martin. Good article.
Can I suggest incorporating the better land price data from Knoll et al (2017), rather than quote Foldvary (2008). We readers can’t tell the scale of the level changes occurring over the 1800s to now from the table from Foldvary.
Knoll et al find average real land prices (I believe this is for urban land) across 11 countries collapsed from about 1897 until a minimum in 1942 and didn’t start ballooning until the late 1980s. I agree with your observation the decline resulted from urban expansion and the elevator increasing effective land supply; I’d add globalization (including global trade and travel, telecommunications supporting dispersion).
Knoll, Katharina, Moritz Schularick, and Thomas Steger. 2017. "No Price Like Home: Global House Prices, 1870-2012." American Economic Review 107 (2): 331–53.
What’s needed to get more traction on this issue is to further develop an economic theory that integrates back to existing economic theories. It needs to explain why now is like the 1800s, and why the 1900s was so different.
We’ve been developing such a theory in the New Zealand government. (I was leading it at the NZ Treasury.) We call it ‘uncompetitive urban land markets’, and it underpins reforms to our urban planning system, the way our fiscal and monetary policy agencies forecast house prices now, the methods we use to analyse housing tax policy etc. Both sides of our legislature has adopted it. We're ahead of the published urban economics literature though, which is frustrating.
The concept is that urban land prices are prone to investment speculation when there are systemic barriers to competitively converting cheap non-urban land to urban uses. High land prices at urban fringes lift land prices in city interiors. Barriers include regulation (growth boundaries, zoning, banning leap-frogging etc), restricted infrastructure supply (roads, waters, schools etc, because “revenue bond financing” stopped everywhere except in the USA), lack of forward planning (to minimize supply costs), local governments not disciplined by Tiebout competition, etc.
However, there are feedbacks that sustain this dynamic, so it doesn’t pop like a typical bubble. The rate of city-wide housing supply slows, raising the cost of renting housing, and land is used more intensively, all of which raises the annual cashflow of land rents. So it can look like a market with 'fair sustained pricing based on fundamentals'. Also, there can still be sustained rate of housing supply even with uncompetitive urban land markets and large extractive land rents.
Ironically, these supply barriers arose in the capitalist economic reforms around the world in the 1980s and 90s. Although, only about a third of US metros suffer these constraints; half are static or in decline (low productivity &/or amenity), and 20% are cheap and growing very fast (eg, the sunbelt).
In the scheme of things it’s not too hard to fix these barriers; the issue more is in awareness of the need for change. LVT would help, especially to help fund local public goods and infrastructure, and to support competing local governments. But getting competitive urban land supply is more important. Relying on governments to socialize these extractive land rents (such as through LVT or by local governments selling new land at extractive prices) instead incentivizes governments to promote higher land rents with which to tax/profit from. China’s whole economy is struggling with this now.
I agree these dynamics create systemic economic instability. It’s more like an extreme boom-bust cycle than the sine-wave-like business cycles taught in macroeconomics. It requires very active macroprudential policy (ie, on bank lending), and undermines politically-independent monetary policy for price stability because there are huge wealth transfers when interest rates change. I couldn’t say if it’s 18-year cycles, but I’d look more at the 1800s experience than current experience nowadays. If that suggests 18 years, it's perhaps a useful prior.
Happy to explain more and supply links.
Chris Parker, Wellington, New Zealand
Hi Chris, and thank you so much for this helpful comment!
I am currently traveling so could only glance at Knoll et al, but it looks really intriguing and I look forward to a closer look!
You make a really good point in focusing on zoning and permissions. I find it very plausible that these impose very real restrains on the housing supply, thereby further increasing bubble behavior. I tend to see YIMBY-style reforms and LVT as fundamentally complementary, one addressing the permission side and the other the incentive side in development.
It is interesting that these regulations materialized in the 1980s and 1990s, but I wonder how they relate to the 19th century pattern? I don't know the economic history well enough to know if such regulations was a major factor then, or if it was more driven by land values independently of regulation.
It is also very interesting to hear about your experiences in NZ government. Is the bipartisan agreement mostly regarding analysis of the issue, or do you also have widespread agreement regarding the policy responses to contain it? I've heard good things about the Georgist community in NZ, and I'd love to know more!
Thanks Martin! Glad it helped.
(I forgot to add banking liberalisation for mortgage lending in the 1980s/early 90s helped fuel land market speculation if supply wasn't responsive.)
You're asking how did those supply factors I mention apply differently in the late 1800s and most of the 1900s? Specifically zoning/permissions, infrastructure, corridor planning?
For zoning/permissions, William Fischel's 2015 book "Zoning Rules!" is great for documenting how public zoning developed in the 1900s because the private law tort of nuisance got overwhelmed with the scale of urban expansion. He then outlines his "homevoter hypothesis" that homeowners use zoning to limit risks to house price reductions that dominate their investment portfolios. I think this helps explain limits to upzoning and intensifying existing areas but doesn't explain limits to urban expansion; I'll come back to this.
Re historic infrastructure supply, I've only studied NZ sorry. Our local governments (LGs) only used "revenue bond finance" funded from special pledged land/property taxes authorised by special local elections until the late 1900s. They were infrastructure juggernauts in the early 1900s. It was a very devolved system, because centralised systems were so inferior back then. Then we flipped to tax-backed (general obligations) debt only between 1989-1995, which is much more limited in comparison. Standard & Poor's US-based staff tell me the USA is the only country left whose LGs can issue both revenue bonds and GO bonds with independent credit ratings. (In all other countries the LGs are assumed to step up and bail out subordinate debts, so it all gets treated like GO debt by the ratings agencies anyway.) Our bond markets are very shallow now, so there's a chicken-egg problem trying to restore revenue bonds. And there's no literature on this issue, so no one cares nor knows. So, again, the bigger challenge is public awareness.
Re limiting urban expansion that emerged in recent decades (eg 'Smart Growth'), this seems driven by concerns about environmental sustainability and LG fiscal sustainability. These weren't concerns in the olden days. I presume environmental issues hadn't compounded yet. I presume elsewhere too that LGs were more fiscally sustained by being smaller with special funding/financing structures rather than general taxing (with minimal barriers to new special purpose LGs being created). (We in NZ idiotically banned all special purpose LG in 1989.)
Re major corridor planning, we in NZ stopped in the 1980s in our 'New Public Management' reforms to have governments step back and not crowd out markets. But more recently Solly Angel (book "Planet of Cities") and Alain Bertaud (book "Order Without Design") argue this is a primary role of governments, so we're trying to restore it. Places like Houston still do it with their Major Thoroughfare & Freeway Plan (MTFP), which is impressive.
Re NZ's bipartisan agreement, yes they relate to the issues and the policy responses. Although, that can always change. Two sources about the development of our bipartisan agreement are:
- Eleanor West (2024) "Up-zoning New Zealand: the localisation of a globally mobile policy idea"
- a new 3-part podcast series hosted on the NZ Initiative "Podcast: Housing Affordability: NZ at the Global Policy frontier, which I helped make. (Part 3 with the current Minister Chris Bishop will be released next week hopefully.)
Yep, interest in Georgism is certainly growing here ;)