by Nevermark | 2025-08-01 17:57:49+00:00
Three major problems with housing economics.

The first two go hand in hand, and could elegantly be solved together:

1 & 2. Pervasively (and perversely), "property taxes" greatly undertax negative externalities, and then heavily (punitively) tax positive externalities.

1. The undertax is that only a fraction of property taxes are just for the land. Land is a limited resource, and "ownership" of land is exclusionary. Exclusion is a negative externality, which is ok as long as that is economically accounted for.

So taxing land more, would encourage more efficient and effective use of it.

2. Property on land is the positive externality. We all benefit when land enables higher active value. More housing, office space, etc.

But it requires investment to improve the usefulness of land, and we not only tax that, but tax it annually, an annual wealth tax!

This is highly perverse, in that it undermines the economics of increasing the productivity of land. Whether a land owner is rich or poor, the economics of putting work or capital into improving one's property come at the cost of being taxed on that improvement - every year - forever.

The solution is to only tax land, not property on it, so land is incentivized to be used efficiently, and investments that improve its active usefulness, are not economically disincentivized.

Making that change and renormalizing "property taxes", not just land taxes, for neutral public revenue, solves both problems with one stone.

A decade or so transition, would allow this change to happen, while giving land and property owners who have made investments under today's regime, time to adapt.

But the end result would be better for everyone.

More efficient, parsimonious, effective use of land. More investments and innovation in increasing property's useful for everyone.

Unlocked growth in real estate returns, as a market primarily based on improving net usefulness, with higher returns, than passive ownership. The latter providing no net benefit to society or the net real estate market.

Credit for the above analysis: Economist Henry George [0]

The third problem significantly compounds the problems of the first two, but would go away naturally if they were solved:

3. Markets take advantage of anything, even inefficiencies.

Given that land is a limited resource, that the value of land increases as investments are made in adjacent properties, even without investments in one's own land, buying up land (with whatever property is on it), and letting others invest in neighboring land is a very good way to get a reliable return on capital. Because demand for land is always going to up, even when used inefficiently, with the current tax regime.

This is an economically parasitical way to make money. It treats land like Bitcoin or gold, in prioritizing its use for passive returns, instead of investment in increasing its active value.

And "parking" of money, for its passive returns, is so reliable, that the financial instrument demand for land drives up prices. Not just by a percentage, but in a self-sustaining and compounding circle of ever rising prices. For an investment "use" that has no net benefit to society.

Resolving problems 1 and 2 would greatly reduce the passive return on land. Which would not only make land use more efficient, but eliminate the compounding pricing problems of near universal use of land as a passive parking place for wealth.

[0] https://en.wikipedia.org/wiki/Henry_George