Sprawl gets stopped by what it starts
The Great Crash of 2008
The Press-Enterprise of Riverside California ran this 2008 op-ed on Sept 15. The writer is a professor of economics at the University of California, Riverside.
by Mason GaffneyGalloping sprawl, such as we’ve experienced in California the last 16 years, set us up for “The Great Crash of 2008,” when inflated land values collapsed.
Urban sprawl inflates the price demanded for nearly every acre from the redwoods to Mexico. It contributes to cycles of boom then bust of roughly 18 years, a rhythm repeated over the last 800 years worldwide. And it will continue thrashing us until we master it.
Booms set us up for busts. Rising land prices, subdivisions, and bank expansion -- each carried to speculative excess -- interact to generate the boom psychology. Buyers and lenders expect to get back increases in land value. So high values cannot simply level off. When they stop rising, they fall.
While algebra lets land rents and values rise forever, common sense and experience tell us that does not happen. For several reasons:
* People and capital spread out over more land; they sprawl. We press on the limits of exhaustible resources.
* In boom times, lemming psychology causes the expected growth of land rents and land values to get ahead of realistic forecasts. This raises the ratio of price to rent above sustainable levels.
* Landowners treat unearned increments as current income, raising their consumption and lowering their real savings. This cuts the supply of loans and raises interest rates.
Unearned increment adds to the incentive to build, so developers overproduce new buildings relative to basic demand, creating more sprawl. For street improvements and public works, governments spend freely, on borrowed money. Outside money rushes in to buy or finance land, becoming part of the local economic base. It’s as though we were exporting land itself. This stimulus soon evolves into debt service that, over time, exceeds the original inflow.
At the same time, lenders’ loan turnover must slow, as they turn from short-term trade credit or commercial loans to long-term loans based on land collateral. A bank that is all loaned out, no matter how sound its balance sheet, cannot make new loans much faster than its debtors pay back the old ones. When many debtors default, banks lose much of their capital and surplus. They have to stop making new loans. Without new business, many fail.
Building stops. We hit bottom. Governments and financial gurus blame the crash on falling land values and bend their efforts to bailing out big banks and sustaining land values, prolonging the depression. Hello? Recall the original cause -- speculation in rising land values?
How do we minimize the land speculation that fuels this cycle of boom and bust?
Regulate banks away from lending on land collateral.
Raise more public revenue from taxes on property in general and land in particular. Prop. 13 stands in the way, but it was going to prevent foreclosures, remember? Now we see things don’t play out that way, but the reverse.
Reform the personal income tax to bear heavier on property income and lighter on wage income.
Change the present income-tax treatment of capital gains to a tax on annual accrual of value.
Base land assessments on current market value, and update them annually (if not with each sale). Before Prop. 13, the assessor was supposed to follow a bull market, not outguess it.
Private fee-appraisers, on the other hand, typically lead the market. They base their opinions on sales of comparables and upward price trends, which were based on earlier comparables and upward trends. When appraisers overvalue land, they confirm and reinforce a boom. There is no cost of production of land to check excesses. That’s how a herd mentality takes over, divorcing prices from reality.
But overvaluation by the public tax assessor stops the herd. When the assessor affirms higher land values, he douses a boom with cold water: higher taxes. It was the lack of such an automatic remedy that let the farmland boom of the 1970s soar so high above reality, then the urban bubble of the late 1980s, and again 2001-2006.
Land value collapses like today’s play a master role in economic crashes. Fortunately, the same progressive tax reform that curbs speculation also curbs sprawl. That’d let the land market operate sustainably.
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