- F. A. Harper, Introduction
- Gustavo R. Velasco, On the 90th Anniversary of Ludwig Von Mises
- F. A. Harper, Ludwig Von Mises
- Property and Freedom, Alberto Benegas Lynch
- Technological Progress and Social Resistance, Guillermo Walter Klein
- Principles Or Expediency? F. A. Von Hayek
- Protection For Farmers, Antony Fisher
- For a Philosophy of Choice, Lord Grantchester
- The Surest Protection, Ralph Harris
- Towards the Just Society, Ralph Horwitz
- Size and Well-being, J. Enoch Powell
- Pour Eviter “une Collectivisation Par Annuities”, René Berger-perrin
- En Défense De L'economie Libérale: Réponse à Quelques Objections, Gaston Leduc
- L'occident Pour Son Malheur a Choisi Keynes Contre Mises, Pierre Lhoste-lachaume
- Das Ordnungsdenken In Der Martwirtschaft, Ludwig Erhard
- Unsere Gesellschaftsordnung Und Die Radikale Linke, Edith Eucken-erdsiek
- Privateigentum— Die Für Mitmenschen Günstigste Lösung Bei Den Produktionsmitteln, Wolfgang Frickhöffer
- Macht Oder ökonomisches Gesetz, Ernst Heuss
- The Reliability of Financial Statements, Ulrich Leffson and Jörg Baetge
- Ist Die Inflation Unser Schicksal? Alfred Müller-armack
- Der Reiche Goethe Und Der Arme Schiller, Volkmar Muthesius
- Krise Der Politischen Formen In Europa, Otto Von Habsburg
- The Need to Make Cognizance Available, Ulysses R. Dent
- Ways to Communism, Giuseppe Ugo Papi
- Convergence Theories and Ownership of Property, Kenzo Kiga
- Soaring Urban Land Prices and Market Economy, Toshio Murata
- Jesus and the Question of Wealth, Alberto G. Salceda
- A Program For a Liberal Party, Gustavo R. Velasco
- On the Entrepreneur Andries De Graaff
- La Integracion Economica De America Latina, Romulo A. Ferrero
- Problems of Economic Responsibility and Initiative Re-emerging In Eastern Europe, Ljubo Sirc
- Rent Control In Sweden: Lessons From a Thirty Year Old Socio-economic Experiment, Sven Rydenfelt
Soaring Urban Land Prices and Market Economy
Whenever Professor Ludwig von Mises found any glimpse of an original idea in a student of his seminar class during discussion, he used to encourage the student by saying, “Why not elaborate on it as a thesis?” It was certainly a great honor for the student to receive such comments from him, because original ideas could occur only in a few occasions.
The works by Professor Mises, however, are filled with many original and thought-provoking ideas. From almost every paragraph, you may find a theory or idea upon which you might elaborate. It behooves us, student of Mises, to expand and develop his theories in each field of our own interest.
The purpose of the present essay is to demonstrate failures of government intervention in market prices of land and private ownership.
Food, Clothing and Shelter
When Japan was defeated in World War II, the Japanese were suffering from a serious shortage of food, clothing and shelter. Thanks to assistance from the United States, the Japanese could escape from starvation. As the Japanese economy gradually recovered, first food, then clothing problems were solved. As far as shelter is concerned, most of the Japanese are so much discontented with the present situation that the housing problem has virtually become an Achilles heel of the market economy.
Not only socialists and communists, but some of the advocates of capitalism attribute the cause of housing problems to private ownership of real estate. Such views are well reflected in the remarks by Mitsuo Setoyama, then-Minister of Construction of the Japanese Government - “Land is not a commodity” - in 1965. You may be surprised to learn that he is not a socialist, but a member of the Liberal Democratic Party.
“Land is not a commodity” does not make sense in the market economy, because the land is actually an object of buying and selling. If his intention was to mean that “land should not be a commodity,” then he was expressing his version of value judgment on private ownership of the land. Anyhow, this will show how serious the housing problems are in Japan.
Gone Are the Good, Old Days
Suppose that all of a sudden one half of the whole population of the United States moved to California. That will give you a fairly good idea of population density in Japan. Due to such a demographic feature and rapid urbanization, urban land prices are tremendously high in Japan. For example, the assessed value of the site of the Sanai Corner in Ginza, Tokyo, in 1970 was ¥4,800,000 per tsubo of approximately $360 per square foot. Its market value is estimated to be at least double the figure.
This is of course the most expensive lot in Japan, but even a dwelling lot in a commutable area to Tokyo will cost substantial money. For example, a subdivisional lot in the periphery of Yokohama, about one hour and a half from Tokyo by train will cost you ¥100,000 per tsubo or approximately $7.50 per square foot.
A typical white collar worker, earning ¥1,500,000 a year, will have to pay ¥15,000,000 for a house of 900 square feet on the site of 2,800 square feet.
In the United States, cost of a residential site will be from 10 to 20 percent of the total value of a house and the site. In Japan, land cost occupies about two-thirds of the total outlay. In other words, it is almost prohibitive for a Japanese wage earner to buy a piece of land in urban areas, unless he has a wealthy uncle to inherit an estate or to borrow money from.
In the good old days, there were many landlords who were willing to lease their land. Rents were determined in terms of rice. They could be better off by leasing their land than growing rice on it. The mutually agreed quantity of rice times current rice price indicated the amount of rents to be collected. Such a linkage between rents and rice prices made rents fluctuate according to business cycles.
Those who retired from employment at their old age could purchase a lot and build apartments on it. Rental income was usually good enough to support the rest of their lives. In such good old days, saving meant a sure way to get future income.
Frustrating Race after Down Payment
If you compare land price indices with wholesale price indices, you will realize a relative position of land as a commodity in the price mechanism. According to the Indices of Urban Land Prices and Construction Cost of Wooden Houses in Japan by Japan Real Estate Institute, wholesale price indices (on 1936 basis) increased faster than urban land price indices until 1953.
As the Japanese economy recovered from war damages and regained the pre-war production level, land price indices began to rise and it finally caught up with the wholesale price indices in 1955.
Since 1956, land price indices have continued to increase faster than wholesale price indices. Particularly remarkable was the period between 1955 and 1968, when land price indices rose nine times as high as wholesale price indices. The very period corresponded to economic growth years, stimulated by the Income-Doubling Plan of Ikeda Cabinet based on Keynesian economics.
During the decade, 16% of the population of the primary industries moved into urban areas. Three megalopolises - Tokyo, Osaka and Nagoya - and their peripheries occupied only 14% of the area in Japan, but 44% of the population lived in those urban areas.
In addition, special business practices in Japanese banks make real estate financing costs very heavy. For example, a prospective purchaser of land who has a deposit of ¥3,000,000 in a city bank will be able to borrow money from the bank up to the maximum of three times as much as the deposit, i.e., ¥9,000,000. However, more than 9% interest will have to be paid for the entire sum - ¥9,000,000, instead of the actual loan, ¥6,000,000 - because the bank insists on keeping the deposit in the bank as a security. The real interest rate will, thus, be more than 13.5% a year.
All these make a race after down payment (one-third of the land cost) frustrating. Many wage earners give up the saving race due to soaring land prices. Instead, they tend to spend the money freely on cars and other durable consumer goods.
Socialists and communists contend that housing problems will never be solved under private ownership of land. Exposed to such propaganda, even a very good advocate of capitalism may turn into a socialist, as far as land problems are concerned. Accordingly, it is necessary for us to consider these problems seriously.
First of all, several proposals offered or to be offered to solve the problems will be examined one by one.
Publication of Land Prices
In 1969, a new system of land price publication was enacted. Under this plan, Real Estate Appraisal Committee appointed by Construction Minister publishes “fair” market prices of standard sites in urban areas, as of January 1, every year.
The main purposes of the system are:
- (1) To give “fair” market prices to the general public, so that they may refer to them in their buying and selling land.
- (2) To make them standard prices in real estate appraisal computation, and
- (3) To determine the amount of compensation for condemnation.
The government authority expected that the land price publication might suppress soaring urban land prices because the public knew “fair” market prices, and that it might prevent them from being exploited by unscrupulous real estate brokers.
As a matter of fact, however, published land prices eventually became the minimum asking prices. In a seller's market, prospective buyers have to bid up land prices anyway.
It was only in 1963 that real estate appraiser licensure was first introduced into Japan. Consequently the general public is not accustomed to asking for the service of real estate appraisers. Moreover, most of the jobs, if any, tend to concentrate on large appraisal institutions. A by-product of the land price publication system was the fact that it functioned as a subsidy to real estate appraisers who had not succeeded in obtaining clients well enough to operate their offices.
Taxation on Vacant Land
Soaring urban land prices merely indicate that the demand for land is persistently greater than the supply of land. There are several proposals to suppress the demand. A first plan is taxation on vacant land, with a view to promoting land use. It was first experimented in West Germany, but the results were not so satisfactory as expected. In Japan, Land System Council and Tax System Council for the government have both considered the taxation, but so far they have not materialized it.
The purpose of taxation on vacant land is reported to be in promotion of land use, but the true aim of the taxation is to discourage speculative investment in land.
In order to implement the plan, it is necessary for the government to determine the area to be covered by the taxation. The border lines will always cause inequitable taxation. A vacant lot may escape from the tax, while another vacant lot, abutting it or across the street in the same neighborhood, may be taxed.
After determining the area under the taxation, the government will have to judge whether a particular lot is held for actual utilization or for speculation. This is certainly a difficult job, and the government will be obliged to appeal to expediency such as holding periods to distinguish speculative investments from others.
Under the present price level, purchasers of residential lots may have used up most of their financing resources. They will have to wait another several years until they have saved money enough to build their houses. Low and middle income brackets which the government intends to help will suffer from the very policy.
In cases where the particular lot is for speculative investment, the burden of the vacant lot tax will be shifted, at the time of the sale, to the purchaser who wants to build his house on it. When small speculators give up investing in land because of the tax, the demand for land will certainly be mitigated to that extent. However, railroad companies and other large real estate corporations will be able to obtain the land at lower prices than otherwise. Their huge capital will make it possible for them to hold on to the land until it yields great capital gains later. Accordingly, taxation on vacant land is not so effective as expected.
Leasing Land instead of Condemnation
Private ownership of land often becomes a hindrance to government porjects to obtain land for public facilities. As the last resort, condemnation procedures are taken. However, eminent domain often meets with severe resistance from those condemned. For example, the condemnation of the site for Narita New International Airport had to appeal to police power to eliminate protesting farmers from the cells and the tunnels dug under the site.
It is ironic indeed that socialists and communists are helping those farmers protest against eminent domain and argue that the government is confiscating their land by the police power. Those farmers utterly forget the fact that the socialists and communists will completely confiscate their land in their “utopia.”
From such experiences, the Construction Minister has suggested investigating the feasibility of leasing land, instead of condemnation or purchasing the land for public use. This plan will, he says, avoid a huge outlay to acquire the land and will secure constant rental income to the owners.
However, such a leasing contract will be obliged to be unequivocal, even if the owners should become discontented with the rents and other terms. Otherwise, the land cannot be used permanently for public use without claims from the owners. In addition, under a leasing contract, the owners will find it hard to purchase new land with rents paid by the government. Thus, leasing land instead of condemnation will make the situation far more complicated than payment at market prices.
The Japanese Government is now facing a shortage of the land available for public housing. Since the rents of public housing are expected to be low enough to make low and middle income families take advantage of it, acquisition cost of the land should also be low.
With the progress of urbanization, however, land prices on the peripheries of a metropolis are increasing remarkably. Higher cost of the land means higher rents for public housing, but the masses will demand subsidies in the form of lower rents.
If the governement leases private lands for public housing and the rents are fixed, the owners will be dissatisfied with them. If the government admits a rent increase of the land, the rents of public housing should be raised accordingly. However, there will be a strong resistance on the part of tenants against such an increase of rents.
In order to make the idea of leasing land for public housing feasible, rents of the land should be flexible enough to reflect the real estate market and rents of public housing should also be flexible. Then, there are no reasons why the government should enter into apartment management where profit management is more appropriate than bureaucratic management, as Professor Mises pointed out.
“Sale and Lease-Back” of Land
Many Japanese newspaper editorials criticize the land policy of the government for leaving private ownership of the land intact. According to their views, the only solution of land problems lies in rendering all private ownership of land to government ownership. Then, nobody needs to pay a huge amount of money for a site, before building a house on it. If only he can afford to pay the rent, he will be able to own his house. Consequently, his cost of home will be greatly reduced.
This proposal sounds like sale and lease-back which is one of the most remarkable developments in the real estate business in the United States. However, “sale and lease-back” of land is different from the ordinary sale and lease-back in a few respects.
In the “sale and lease-back” of the land, the government will pay the sellers bonds, instead of cash. Otherwise, inflation will be inevitable. Probably the governments will fix the maximum area of land to be compensated in each category of land and seller respectively, and the rest will be confiscated. Owners of land wider than the maximum area will not be able to lease-back the difference.
The relative position of the sellers will be determined by the balance between interests earned from the bonds and rents to be paid for the lease-back. If the former exceeds the latter, the sellers will have income on a continuous basis.
In the sale and lease-back of the land, the sellers will lose an excellent hedge against inflation, as is the case with other sale and lease-back contracts.
It is certainly true that home-ownership by individuals will become far easier than before, so long as financing is concerned. The same will apply to commercial and industrial properties. With the same amount of capital, three apartment houses may be built, instead of two. The resultant competition for sites or for the same site will bid up the rent.
In a free market under private ownership of land, there exists gross rent multiplier, which is the ratio of the market price of the lot to annual gross rent from it. After acquisition of private land by the government, there will be no sale prices of the land. The rent will then lose the linkage with the market price of the land.
However, so long as a free market for rents still remains even under public ownership of land, competition will function in such a way that each lot will be utilized for the highest and best use on economic calculation twisted to some extent by public ownership of land.
As the famous preamble of the Code of Ethics of the National Association of Real Estate Boards emphasizes, “Under all is the land.” Every human activity is, directly or indirectly, supported by the land. It is, therefore, frequently necessary for a tenant to improve the land, in order to make the site more suitable for his use.
Since the government owns the land, such improvements will need approval from the government. Cost of such improvements to the land by the tenant will have to be assessed by the government, and at the end of the lease term, the cost will be defrayed to the tenant. Then, a new problem will arise - whether the cost to be paid should be the original cost or the current cost.
If the rent should be determined by the government at the rate lower than that in a free market, there will be more demand for than supply of the land. The government will be obliged to select the tenants by means of lottery or some other arbitrary criteria.
Consequently, the land may be leased to those who cannot use it for the highest and best use. Moreover, government officials in charge of leasing contracts will be exposed to temptation of corruption.
It is quite possible that leasehold estate may be bought and sold. In an extreme case, the price of the leasehold interest may become a substitute for the price of land ownership.
Evaluation of Land without Free Market
If there are no free markets for land and rents, the government will be obliged to find some other basis for rent determination. Advocates of nationalization of land would contend that there will be no problems in determining rents because they have already a fine system of evaluation for taxation. Every bit of land privately owned has assessed value determined by government officials.
Under private ownership of land, assessors will use as the basis of assessment valuation (a) real market value, (b) value at a forced sale, or (c) full market value. All of them are, directly or indirectly, linked with market prices of the land.
For the time being after nationalization of land, the government will be able to refer to the past records of assessment valuation of the land, as the basis of rent determination. But the changes in social and economic data will soon make the valuation meaningless.
The government will probably multiply the rent in the basis year by indexes derived from various factors to obtain a new rent. However, since the main motive of nationalization of land lies in suppression of skyrocketing urban land prices, the rent will be naturally determined at a rate far below that to be determined in a free market.
Such rents determined by the government will not reflect the true valuation by countless buyers and sellers of land. Some tenants will become more favored than others who pay the same amount of rent.
Rent Determination by Appraisers without Markets
In the preceding section, we have found that assessment valuation is a poor substitute for market prices in a free market. Then, is value estimate by appraisers a good substitute?
Real estate appraisers utilize in estimation of land value (1) market data method, (2) distribution method, (3) development method, or (4) land residual method.
In the market data method, the subject site is compared with sales of similar sites. With due adjustments, the value of the subject site is estimated. Sales data, therefore, are prerequisites to market data method. Under public ownership of land, there are no sales data which the method can refer to.
In the distribution method, a certain percentage of the market value of a property (land and building) will be distributed to the land. This method also necessitates a real estate market which is non-existent under public ownership of land.
A third method is used in the appraisal of large tracts for residential development. In the development method, the most probable price to be paid for a lot will be estimated by the income bracket of the prospective buyers of the lots. In this method, which income bracket to choose will become a new problem. The knowledge can be obtained only in a real estate market. Without the market, the development method will be more guess-work.
In the land residual method, annual net income imputable to interest on the value of the land is estimated as residual, after deducting anticipated annual net income to the building value from the estimated net income before recapture to the entire property (land and building). Then, the residual income is capitalized to indicate the land value.
The land residual method has advantage over other techniques in that it does not resort to market prices of the land. However, this method functions best when the building represents the highest and best use and when it is new or nearly new. Different appraisers may have different opinions on what is the highest and best use for the subject property. Moreover, a slight difference in “capitalization” rate will produce a great difference in the land value.
Real estate appraisal under private ownership of land is an estimation of market value in an open market. It can utilize three basic approaches, correlate the value indications derived through three approaches, and arrive at a final estimate of value. Since appraisal is an opinion, it may or may not coincide with a real market price. However, it always takes into consideration real valuations of buyers and sellers of land in the real estate market.
Real estate appraisal of the land under public ownership is merely a justification by numerical figures of a guess-work on fictitious prices of the land and its rent.
Professor Mises rightly says:
They [neosocialists] want to abolish private control of the means of production, market exchange, market prices, and competition. But at the same time they want to organize the socialist utopia in such a way that people could act as if these things were still present. They want people to play market as children play war, railroad, or school. They do not comprehend how such childish play differs from the real thing it tries to imitate. (Human Action, p. 703)
All above discussions show that the government will be forced to play market, regardless of the means to which it resorts.
Solution to Housing Shortage
Housing shortage is not caused by a scarcity of land, but by a scarcity of capital. Construction of high-rise apartment and office buildings will reduce the burden of heavy land cost through more intensive use of the land. An express transit system which connects suburban areas with metropolitan areas will turn the suburban land into residential sites to be offered at reasonable prices. Prefabricated and modular housing will economize the cost of houses. All these need capital.
If the government really wants to solve housing shortage, it should stop inflation and should encourage saving. Restrictions on foreign investment in the Japanese housing industry should be repealed. Instead of suppressing the demand for residential sites through various intervention in the market economy, the government should promote creative activities of developers, builders and investors, through returning to the sound economics as expounded by Professor Mises.
In this respect, Spencer H. MacCallum's proprietary community idea is excellent. It gives us a great hope to the solution of housing problems under private ownership of real estate.
In the above discussions, we have considered some failures and possible consequences of government intervention in market prices of urban land. All these reconfirm the validity of the impossibility of economic calculation in a socialist society, which is one of the immortal contributions to economics by Professor Ludwig von Mises.