a crank's progress

Imagine paying $60,000 more than the asking price and thinking you got a deal…

So the seller gets $60,000 more than the asking price…

[for] an $800,000 four-bedroom townhome in Lynnwood with space for a home-office and rooms for their teenagers, he said.

and the realtor® makes their percentage.

So where did the $800,000 value come from? What makes a townhome worth $800,000? (And seriously…townhome? Call it a townhouse and be done with it.) Same as any other property…what’s around it? What investment went into those properties that make this place desirable? Good schools? Shopping? Restaurants? A park? The seller didn’t build any of that. Their taxes might have paid for some of it, same as everyone else’s, but I feel confident they listed a lot of nearby amenities they didn’t build or pay for.

Not that there is anything wrong with that. If I were selling a place that had a tremendous view, I’d mention it, even though the play of light over it was not my own work.

The point of a land value tax or a ground rent would be to recoup some that unearned value, recapturing the value of the land and location, and driving development of nearby parcels. If I am sitting on vacant land as other people develop theirs, I’m doing fine if the “highest and best use” of that land is for parking or as another brownfield or graffiti exhibit. But what if the assessor sees those nearby parcels and decides mine should be valued as if it was in productive use, rather than as a speculative asset? Am I going to sit on an idle parcel of land that is being taxed based on what it could be worth once developed? Not likely.

The neighbors around this lucky family built up that $800,000 sale price through their own investment of time and money but what do they get? Sure, they get the promise and hope that they’ll be able to do the same in their turn. But the floor under that investment, if you like, is the work of the commons, every person who funded the roads or schools or utilities that made that place worth buying into. And the rewards all get pocketed by the cartel members, the land owners, who benefit from scarcity and a system that rewards private wealth creation at public expense.

This fellow has the idea that no one gets rich from housing, not even him. Lower cost development with a cap on the sale price, in perpetuity — these will will be both 20% smaller and 20% cheaper than market rate flats.

“It turns us into these little mini-capitalists,” he says. “I don’t think housing should be an investment in that way. It’s become a casino economy because we’re undersupplying housing by a factor of two.”

How does he do it? It’s no secret. There are no tricks.

A 20% price discount on small-scale developments is difficult to achieve for private developers that want to make a profit. Pocket’s formula tackles the challenge in two main ways, one of which is the space cut. It aims for 37 sq metres (400 sq ft), compared with the UK median floorspace for flats of 43 sq m (“just under the size of four car parking spaces”, as the Office for National Statistics evocatively adds). Indeed car parking, and extra bathrooms, are among the extras Pocket eschews.

Vlessing is candid about the compromise: “If you make something bigger at 500 sq ft, my people can’t buy that.”

He has found a market niche that needs to be served.

His people are the capital’s relatively low-earning first-time buyers – the average annual income of a Pocket buyer is £39,000 – and cash buyers. Flats in outer boroughs such as Barking start at less than £200,000, while closer to the centre the prices can be £280,000 or more. Crucially, the buyers are contractually bound to pass on the 20% discount to the local market rate in perpetuity, reducing the scope for flipping.

At today’s exchange rate, that’s a $277,000 flat — to own — in an outer borough.

The model has proved durable: the 1,000-flat milestone will be reached around November. Pocket is also starting to expand into two- and three-bedroom flats, albeit at full market rates.

The company aims for a profit margin of 15% on developments, lower than the 20% to 30% enjoyed by the bigger housebuilders. In 2020, Pocket Living made revenues of £56m, nearly £20m lower than in 2019, and a pre-tax loss of £870,000 in 2019 swelled to a £6.3m loss, according to its latest accounts. Vlessing says it was an investment period, and profits will come from 2022.

What kind of planning permission would it take to do this in our housing-starved cities? He doesn’t mention the price of land but perhaps that’s part of the scheme, getting inexpensive leaseholds for unusual or small parcels. Seattle has unused land it could use for this and a lot of land locked up by speculators that could be put to use with some gentle persuasion, like zoning changes and a ground rent.

[rewrite of this piece, after a database crash]

These local newspaper stories…

“’Dystopian nightmare’ state of downtown scares off investors,” went the headline about the lowball sale in the local business press, quoting a real estate broker.

“This is another example of how some investors and developers continue to place money in the city despite its anti-business reputation and the encampments of homeless people lining some streets,” the Puget Sound Business Journal noted.

What would it take for the local business press to walk that back? Maybe this?

[T]his past week Amazon said it is hiring 12,500 people in Seattle, the most of any city, in a fall jobs blitz.

“Amazon’s hiring spree is concentrated in Seattle,” this newspaper reported, adding that this is a “degree of rebuke” to the idea the company is jilting us over the payroll tax.

After all that scene setting, we’re told that a property in downtown Seattle, right by Amazon HQ, sold for a lot less than expected…it was listed at $9 million and sold for around $6 million. That’s $6 million for a small parcel with a $1000 building — a 1937 built teardown. No one bought it for the oil change facilities. About 1/6 of an acre, but if we apply we same metric as on the Mercer Megablock, we could value that at $1 million a year per acre…so about $150,000 a year in ground rent. If it were up to me, I assess it with an eye to how close it is to Pike Place Market and the waterfront, the light rail, all that downtown goodness, and write it up to $250,000/year. If they don’t want to pay it, someone else will. Ideally, the ground is all that changes hands for a pure land deal, in which case this would likely be a lot higher while the “purchase” wouldn’t really be a thing.

By way of comparison, the current assessed value of $6,804,000 means the property tax (on the all-but-vacant lot) is $64,454.26/annually. We know that land is worth far more than that and that its value doesn’t come from the Jiffy Lube but from all the other development around it. That’s how land values have always worked.

After all, “a 45-story tower, with 32 stories of “co-living,” nine stories of hotel and three stories of common amenity space” should make some money for the developer/investor, enough to cover the rent. And nothing pleases me more than seeing landlords having to make rent through their own sweat instead of making money in their sleep.

We see stories all the time about land sales (often described as sales of a business but the land is the play in Seattle or anywhere else) but the business press never considers how a set of map coordinates could command such a high price. That lot size — 6480 sq ft — is what a single family home in the northern reaches of Seattle comes with. So why is 1/6 of acre in downtown Seattle worth $6 million when the same size parcel in Maple Leaf might be $600,000? Could it be…location, otherwise known as proximity?

 

 

 

I posed the question “why is there a housing shortage in the 4th largest yet 48th least populated US state?”

Note that the people who live and work there need — for simple economic reasons — to live near other people, ie, jobs, commerce, existing municipal services. Bozeman and Butte are no different than New York or San Francisco in that regard. People go there to find work, just as people have gone to the cities forever.

So once again, we have established the value of cities and land, of density (relatively speaking), but we seem unable to grasp that that value belongs to those who created it, those who live and work there. Wealthy paradise seekers want a piece of whatever Montana or NorCal in its day has to offer. It’s up to those who live in those cities themselves, who created that value, to decide how to recoup their investment. A few lucky speculators shouldn’t control that, shouldn’t be allowed to sell off huge parcels and drive the price of land out of reach of those who need to be there in favor of a few who just want to be there a few weeks a year.

A ground rent that reflects the highest and best use of land and encourages its development to meet that expectation would allow people to live and work where they want to, defeat sprawl (by making exurbs unaffordable and already earmarked land impossible not to develop), and fund services without fear of losing the tax base. The land itself is the tax base.

We met wealthy paradise seekers earlier as we saw how their arrival in a beauty spot distorts and ruins what makes it beautiful. After reading this well-written but depressing piece on the carceral industry’s impact on Appalachia, it turns out there is a similar effect when prisons are dropped onto the old mountaintop removal sites.

Economic studies show that prisons do decrease levels of unemployment in the communities they are located, as often promised, but they also show existing and newly built prisons result in a decrease in per capita income, as well as an increase in poverty levels. That means that likely higher paying prison jobs are given to new employees from outside the area while local residents are given lower paying jobs with fewer benefits. — emphasis added

Read the whole thing, as the kids say. It’s good quality reporting and analysis/commentary, something we don’t get nearly enough of these days.

Montana is the 4th largest US state, at 145,552 square miles, and the 44th largest in population with 1,085,407, 48th in density.

So why is there a housing crisis in Bozeman?

In June, the median sale price for a single-family home in Bozeman – a county of 115,000 inhabitants – was $720,000, up 49% from the same month a year earlier, according to a local realtors’ association. The US census reports the county gained 30,000 new people in the last decade, as the sprawl of new homes and condos for miles can attest. https://www.theguardian.com/society/2021/aug/26/american-west-income-inequality

Those are Seattle prices and Seattle alone has almost as many people as the whole state of Montana.

Schmidt jokes that “low-income” in Bozeman now means anyone who makes less than $70,000 a year. As the city’s unhoused population rises and workers both blue and white collar flee to cheaper towns and other states, it’s hard to not see his logic.

$70,000 a year is what Dan Price at Gravity Payments settled on a starting wage for his employees a few years ago. What jobs pay that in Montana?

“Every week we have calls from people who have been on a month-to-month lease on a property here in Bozeman, and the landlord informs them that they will not be renewing it,” says [Brian] Guyer [,the city’s affordable housing coordinator]. “Those people are finding alternatives, like sleeping in their car. We’re seeing a big increase in the number of urban campers.”

Rentiers are not renewing leases to working people when they can make more renting to wealthy paradise seekers. That’s the landlord’s game, as any one knows who has played Monopoly.

And this is pretty close to what I have been saying about gentrification:

Wealthy people are often trying to “undergo a personal transformation of sorts” when they move west, but they don’t consider how that transforms communities.

“First when very wealthy people move into a place, they bring with them the culture and lifestyle they have. There’s a bar for what they expect in terms of services,” says Farrell.

Thus, a city like Bozeman gets a better variety of restaurants and bars, some better hiking trails and other perks, but when residents are priced out, who can afford to live there and enjoy the amenities? “The underlying structural issues are getting worse and a lot of that is caused by their presence,” says Farrell. — emphasis added

What attracts wealthy paradise seekers is what’s already there…the open spaces and higher buying power. The new bars and high-end restaurants are how the locals pry money out of the newcomers, at the expense of their own workers and ultimately themselves, as their own rents and other costs go up.

Wealth equals power, as Adam Smith reminds us (after Hobbes) and land is wealth, that the more people who have to compete to access to land, to live or work on it will have to pay more (after Henry George).

In Bozeman, Brian Guyer braces for things to get worse before they improve. The city’s affordable housing coordinator himself had to move out of town, 25 miles away to Livingston, when his landlord jacked up his rent.

So what is to be done? Regulate land as a public utility…tax the value of land to return the value created by workers and business owners to the city and make sure land gets used to its highest and best value. If developers want to attract wealthy paradise seekers, they should pay for the productive value of the land they develop. View property or large parcels that could house tens of working families should be taxed based on that value, not sold and held out of productive use with a single large house that lies empty part of the year. By all means, come visit, but remember you are a guest. Seek paradise but don’t think you can own it.

Climate scientists and urban planners increasingly suggest that one of the most impactful ways to slash greenhouse gas emissions is to make cities denser. This change, scientists have calculated, is even more impactful than installing solar panels on all new constructions or retrofitting old buildings with energy-saving technologies. Residents of cities like San Francisco, Chicago, New York and Minneapolis already have much lower carbon footprints than in the surrounding suburban sprawl. City dwellers tend to have smaller apartments that require less energy to heat and cool.

But it also means a certain American way of life may have to end.

The Bush pére doctrine — that “The American way of life is not up for negotiations. Period” — has been in play for 30 years.

The reality now seems to be that we must negotiate with hostage-takers who mean to kill anyone who prevents them from getting their way…you know, terrorists.

The article linked above seems to argue a different point than the accompanying illustrations…

What I see is that there is a quite a bit of dense urban land use — Sunset is in the green/dense bit — but that it turns to suburbs pretty quickly. The lower peninsula could be more dense, but for zoning and height restrictions. If Atherton wants 1 acre lots, it should be taxed on the productive value that land represents: an acre that close to San Francisco could be making a lot more money for the municipal area, enough to fund the transportation needed to get into the city.

The quiet, tree-lined Sunset District has been roiling with controversy over the construction of a seven-story affordable housing unit. At tense community meetings, residents complain that the construction would block sunlight, drive up congestion and rustle up toxic dust. “Not in my backyard” demonstrators clashed at protests with progressive “Yes in my backyard” counter-protesters outside the proposed site. It reached a fever pitch early this year when anonymous leaflets appeared in neighbors’ mailboxes, charging: “No Slums In The Sunset.”

What would Henry George think of this?

Sounds to me like some of those folks don’t know how slums come about. When the taxes on a parcel of land exceed what it earns — when a retail store or small rental can’t cover the taxes due from the revenue coming in — the property will become “slummy.” Maintenance will be deferred, rents will be lowered as the building and neighborhood become less desirable, and in many cases, the building may be abandoned, boarded up, as it becomes too much of hassle to manage as anything other than a piece of land. If the taxes on land and improvements are designed to push that land to its highest and best use — redeveloping it, increasing density, as needed — you prevent slums. Slums are part of the landlord’s game. The building may be an eyesore but the land’s value keep rising, based on the investment in neighboring parcels. Let a few rentals in “leafy” Sunset become a little grubby and see how that plays out.

Of course, we all know that “slums” means any multi-family rental development and what’s behind that coded language.

It would be useful if someone unpicked the construction — a temporary nuisance — from the longer term possibilities. I have been through Sunset and I didn’t see it as a tree-lined paradise along the route I took. It was all zero lot-line homes cheek by jowl. A quick look at Google Maps doesn’t enlighten me as to any tree-lined streets: I see some widely-separated street trees but the real truth is that the greenery is in the back yards.

The streets are hardscape, streets and sidewalks with houses pulled up the sidewalk.

What the people of Sunset want is much the same as in Seattle: they want private yards, not public spaces, suburbs rather than a city.

So that’s the much-loved American way of life for many…private spaces over public with the accumulated wealth of the landlord’s game. We are all held hostage to this idea and I don’t see how we negotiate our way out of it.

“A lot of cities are worried about affordable housing and gentrification so these issues have to be dealt with very carefully,” said Christopher Jones, a climate policy expert at the University of California, Berkeley. “Also, if you build more density in the urban core it could end up in more sprawl with growth, with people wanting larger, cheaper homes and then commute into these new vibrant centers. It’s a bit like pouring sand on to a map – it will keep spilling out.”

Not always sure the meaning of gentrification is understood. It doesn’t mean land or buildings gets upcycled or redeveloped. That’s actually a desirable outcome. Gentrification means a land owner sells property that other people have made valuable to wealthy newcomers, forcing those who created that value to relocate and start over. But yes, he is right, that the American way of life is suburban, that people prefer private spaces to public ones. This is what we subsidize through road and highway construction and land use policy. It’s not so much choice as a carefully curated policy that enriches land owners instead of building value for all.

Five Washington communities—Spokane, Yakima, Spokane Valley, Granger, and Battle Ground—have passed resolutions in recent weeks pledging to outlaw income taxes at the local level if the state adopts income or capital gains taxes. More jurisdictions are promising to follow suit. Local officials are intent on sending the state a message. “Small businesses are the backbone of our local, regional, state, and national economy and it is imperative that the city not put unnecessary hurdles in the way of their success,” Battle Ground’s resolution declared.

I agree. Small businesses are that important. But surely very few small business owners will pay a tax “amounting to a 7 percent levy on capital gains from the sale of stocks, bonds, and other types of investments where the profit exceeds $250,000.” That doesn’t cover revenue, profits, or wages paid out of the business, just the proceeds from the sale of investments. Of course, if politicians really cared about small businesses, they would have passed Medicare for all or the equivalent decades ago, to allow small businesses to grow without having to manage benefits for employees, and employees would be free to start their own businesses without worrying about healthcare for themselves, their families, or employees.

The real problem remains the state’s Uniformity clause, approved in 1930, which says all taxes in the state must be “uniform upon the same class of property.” Property is defined as “everything, whether tangible or intangible, subject to ownership.” Now, IANAL, but from where I sit, that definition has a big hole in it. How do you class land which no one made nor can anyone destroy or move with an improvement or building placed on it? How is an improvement, be it a parking lot or skyscraper, the same class as a parcel of land? We have all the land we will ever have but how we use it changes all the time. There were farms in Manhattan, after all, but no one could afford to farm it now. It’s too valuable as commercial real estate. And that value is what should be taxed to benefit those who create it.

“Capital gains are clearly income. And when you tax them, it’s an income tax – no matter what you choose to call it.” No argument here. So why not look at another way to collect the revenue from economic growth that actually helps drive it? But don’t listen to me: let Milton Friedman explain it…

Standard economic theory suggests that a land value tax would be extremely efficient – unlike other taxes, it does not reduce economic productivity.Milton Friedman described Henry George’s tax on unimproved value of land as the “least bad tax”, since unlike other taxes, it would not impose an excess burden on economic activity (leading to zero or even negative “deadweight loss”); hence, a replacement of other more distortionary taxes with a land value tax would improve economic welfare. As land value tax can improve the use of land and redirect investment toward productive, non-rent-seeking activities, it could even have a negative deadweight loss that boosts productivity. Because land value tax would apply to foreign land speculators, the Australian Treasury estimated that land value tax was unique in having a negative marginal excess burden, meaning that it would increase long-run living standards.

Sounds like the predictions of NYC as a ghost town were premature…

Seinfeld made the same argument a year ago.

If Henry George had won the NYC mayor’s race and introduced ground rents to the USA’s wealthiest city, we might have seen a very different 20th century.

It is an experiment taking place across Silicon Valley, which often sets trends for other large employers. Facebook and Twitter cut pay for remote employees who moved to less expensive areas. However, Google’s pay calculator tool – which allows staff to see the effects of a move – suggests remote employees, especially long-distance commuters, could experience pay cuts without moving.

It continues to puzzle me how companies like Google, Facebook, etc., have yet to figure out that the higher wages and rents they have to pay tie back to this observation by Henry George:

Like a flash it came over me that there was the reason of advancing poverty with advancing wealth. With the growth of population, land grows in value, and the men who work it must pay more for the privilege.

The higher wages they have to pay, as well as the higher rents or costs to acquire buildings and land, all go to the pockets of speculators. The high value of land is driven by the work performed on and around it, not due to any investment by the rentier.

Now we see that companies will punish workers for the temerity to make the choices that their employers can’t or won’t: to move to a place with a lower cost of living, less graft for the rentiers.

In cities like NYC, San Francisco, or Seattle, the rents — for commercial real estate and home purchases/apartment rents — rise with wages, not based on the intrinsic value of the property. You have to be there where the action is and the rentier is there with her hand out. If cities or employers realized that there was a whole industry skimming off the cream, the value of the location that they had no hand in creating, they might be inclined to do something about it. But that revelation is long in coming, even now, more than 100 years after Progress & Poverty.