After the Housing Bubble Bursts, Fix It!
|October 20, 2004||Posted by Jeffery J. Smith under Archive|
What To Do About the Real Estate Bubble
After the Housing Bubble Bursts, Fix It!
Here is a special guest article on a very timely topic.
by Jeffery Johnson Smith
President of the Geonomy Society
Whats bubbling, and until when?
Sellers are happy. So are developers and speculators. Real estate has gone all bubbly, and that bubble has gone ballistic. What goes up, however, must soon do something else.
Recently, a growing number of commentators have predicted that housing bubble is about to burst. Of course, that is what bubbles do, but when? As with the rest of the economy and with cyclic systems in general, when depends on the last time building values peaked then collapsed.
Actually, its not housing whose price has entered the stratosphere. Buildings age - get older, more worn out. Whats getting more valuable is the land, the location - whether it has a building on it or not. Buildings you can make more of, but land you can not, especially locations along the coasts or on the good side of town. None of that would matter if you could ever get buildings to hover around in the air. Meanwhile however, speculators are happy.
Bubbles benefit anyone?
Yet owners can cash in only if they take on a second mortgage or sell out and move on, breaking up the old neighborhood. Plus, sellers live and work in the same economy as buyers, who are not so very happy campers. Whats seemingly good for landowners is not necessarily good for the economy. As people spend more on land, something nobody produced, they spend less on output, things people do produce. As producers get less money spent on their products, eventually they take the hint and produce less. “Produce less” is another way of spelling recession.
Plus, more expensive land means heavier borrowing to buy it. More debt means more inflation and less stability. When producers cut back, borrowers have a much harder time paying back their debts. As people go bankrupt, they drag others down with them. A collapsing house of cards is another way of spelling depression.
No matter how hard lenders try to stave off the day of reckoning lowering lending rates, easing up on credit requirements, buying more federal bonds with new money that never existed before, overstocking banks with cash no bubble has ever lasted forever. The only thing all that superfluous money has ever done has been to pump up that bubble ever fatter and thinner. Regardless of central banks, land prices have averaged an 18-year cycle, rising then crashing. And the bubbly part of that cycle are the final few years.
After the fall, where is terra firma? Well, the higher they rise, the steeper they fall. Sometimes the value of locations lose 25% of their inflated value. Sometimes half. Japan, after it peaked in 1989 when the grounds of the Royal Palace in Tokyo was worth more than the entire state of California, has seen three quarters of all that froth blow away.
If land values didnt get inflated, of course they would not have to get deflated. While in rhythmic systems, prices must rise and fall, but they need not boom then bust; they could climb then glide. What would temper economies, preventing bubbles? Rather than let a few lucky owners collect land values, neighbors would have to recover land values for themselves. Nobody made land, and no lone owner made its value; the presence of society in general did that. Plus, for excluding everyone else from their sites, owners owe everyone else, as each one of us owes everyone for excluding them. Call it mutual compensation for deprivation from part of our common natural heritage.
To recover land value, government could either transform the property tax into a land tax or replace it and other taxes with land dues or land use fees or an annual deed fee. To share the recovered land rents, government could replace subsidies with a dividend paid to citizens, a la Alaskas dividend from oil royalties. Replacing taxes with land dues and replacing subsidies with rent dividends is geonomics. Once implemented, geonomics changes the dynamics of the land-price cycle and the whole economy.
To pay the land dues, owners use their land efficiently; owners who had been speculating get busy and develop. No longer allowed to tax anything that moves, local governments, too, which presently let acres of abandoned urban land and buildings lie fallow, get busy, too, and make sure to get those acres into the hands of ambitious owners wholl pay land dues. More locations put to use and more buildings put up increases supply, which dampens price.
Better still, as government recovers land rent, that leaves owners with less land rent to capitalize into land price. Hence buyers need not borrow so much. And when governments pay dividends instead of subsidize services (especially corporations who do so little to be served so lavishly), then they need not borrow so much (corporate welfare is roughly twice the federal deficit). Banks could not so much flood the economy with cash. What would speculators use to blow up the price of land? Nothing. They couldnt.
Land would still rise in value. With every discovery of a nearby natural resource. With the opening of every new bridge. With every techno-advance, as silicon wafers did for Silicon Valley. With every jump in income and drop in crime, land value rises. But no longer into a bubble. Because every rise would find its way via land dues and rent dividends into everyones pockets. Rising land values would no longer wrack the nerves but delight the spirit. With the extra income, one could finally add on that deck or shrink the workweek or both. Alas, some day.
Rarely chartered waters
Back in 1989 (when Japan peaked), Bushs Economic Advisor, Greg Mankiw (then merely a Harvard prof), predicted housing prices would implode in 2007 a period of 18 years. Herman Kahn, famous for thinking the unthinkable waging a nuclear war and for founding Future Studies, warned investors of the 2000 stock price collapse 18 years before it happened. Another prognasticator using the 18-year land price cycle had pegged the markets debacle a year earlier in 1999, but Samuel Benner made his guess in1875.
If the 18-year average holds for this cycle, then real estate still has a few more years of sucking all the investments and purchasing power out of the rest of the economy. Land is still able to soak it all up, and lenders are still willing to pump more in. So despite the premature panic (markets almost never do what everybody says theyre going to do), Mankiws 2007 would be the earliest that the current bubble would burst, and 2008 is just as likely.
Then land prices will fall for a few years. Since the run-up was steep, the drop will be, too after correcting for inflation, maybe as much as 50%. Which will be an enormous relief for the economy just what the doctor ordered. With land affordable again, a new cycle can get under way. Whether the new one will be boom and bust or climb and glide is up to us, whether were willing to practice geonomics, to forego taxes and subsidies in favor of land dues and a Citizens Dividend.
While I dont mind the current gambling, I do mind the widening of the cavernous gulf between haves and have-nots, and I boil over while workweek grows more onerous, and just seethe watching vacant lots and abandoned buildings push development out from urban cores to sprawl on suburban farmland. To reverse that, lets let go of the individual owners hold on land rent and share Earths worth equitably among us all. Well all be glad we did.
Jeffery J. Smith edits The Geonomist, appears in the academic press (e.g., Planning and Markets University of Southern California) and the popular (e.g., The New York Times, 2002 Dec 22), speaks at conferences, initiated a bill in the 2003 Oregon legislature, presides over the Forum on Geonomics, and is a member of Mensa. Reach him at 3604 SE Morrison St, Portland OR 97214 USA; Ph 503/234-0809; email@example.com; www.geonomics.org
Copyright 2004 by Jeffery Johnson Smith. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Jeffery Smith and The Progress Report.
Also see this recent classic by Fred Foldvary:
The Real Estate Bubble
What are your views? Share your opinion with The Progress Report!