Rent is an amazingly effective means of redistributing wealth upwards. I have easily paid over £100k rent in my life, always to people substantially richer than I am.
Always enjoyed this Churchill quote - from 1909!
Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains -- and all the while the landlord sits still. Every one of those improvements is effected by the labor and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.
> He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.
The value landlords provide is the assumption of risk. The premium you pay to rent is in exchange for vastly limiting your exposure to said risk.
This is why offloading the risk onto creditors (ie purchasing real estate with borrowed money under an LLC) is so lucrative. You reap all of the rewards of property ownership, but none of the downside. In a failure scenario your creditors are on the hook, not you.
I should probably add that banks are not stupid and it is very difficult, but not impossible, to get a loan for real estate investment under an LLC.
> The value landlords provide is the assumption of risk. The premium you pay to rent is in exchange for vastly limiting your exposure to said risk.
In hot housing markets, the value they provide is having access to the capital necessary to own property.
A 30 year old hairdresser in Seattle isn't renting because they don't want to deal with risk - they are renting because they can't save up a $XY,000 downpayment, and tie their entire salary into interest payments.
Mind you, the capital requirements for property ownership are pretty insane, and our low interest rates really don't help matters any (Home prices have ballooned, in part, thanks to them.)
Hot housing markets are extremely high risk high reward investments.
Buying NYC real estate for example, it is practically impossible to use a traditional "buy and hold" strategy and have the rents cover the cost of investment (typically rent covers more like 50% of operating costs in NYC). You pretty much only make money in NYC REI via speculation (ie the property goes up in value) not from paying down the mortgage with rents.
The solution to high pricing is to increase supply of housing. Mind you _this_ is an area where landlords do have high rent-seeking behavior in the political sense. Landlords are incentivized to push for increased regulation that limits new development whenever possible. As much as I hate to use him as an example due to his "lightning rod effect," Trump, for example would see his net worth plummet if NYC development regulations were relaxed.
Last I heard, NYC is literally running out of pavement space for pedestrians, let alone vehicles, and increasing the supply of housing still hasn't brought prices down.
NYC has tons of regulations that _drastically_ limit the supply of new housing. New supply hasn't even come close to keeping up with new growth. New supply is a drop in the bucket.
> Last I heard, NYC is literally running out of pavement space for pedestrians, let alone vehicles
That's news to me, as someone who lives and works in the two busiest and most crowded neighborhoods in the city
> and increasing the supply of housing still hasn't brought prices down.
Yes, but that's because of the way new housing has been constructed (skewed towards luxury buildings, which are purchased by foreign speculators as ways to park money essentially tax-free). That means that many of these new units that are constructed don't actually increase the supply of housing, because speculative purchasers tend not to rent out the units (it's not worth it, given their goals).
> (NYC running out of space for pedestrians) is news to me, as someone who lives and works in the two busiest and most crowded neighborhoods in the city
> A 30 year old hairdresser in Seattle isn't renting because they don't want to deal with risk - they are renting because they can't save up a $XY,000 downpayment, and tie their entire salary into interest payments.
If you're talking about cities like Seattle, the reason that a 30-year-old hairdresser would have a difficult time purchasing a place is because prices have been pushed absurdly high due to two factors:
a) a housing shortage (primarily in the SF Bay Area, but Seattle has similar problems, and the SF housing problems spill over into other nearby cities)
b) speculative purchasing by foreign entities
The second point is less relevant Seattle than it is to nearby Vancouver - and nowhere is it more true than in New York City - but it still has a huge inflationary impact on property values in a way that doesn't benefit any local residents at all (the properties are used as places to park money by people who don't live there, and may never even have visited the US).
I'm starting to think it is less about foreign investments, like a few other comments have noted, and more about changes at the top end of the middle class.
Along with the large amounts of growth, wages in the upper middle class have really increased a lot. If you look at tech workers, it was pretty common to see average tech employees pulling in $75k-$150k a decade ago; today employees at a similar level and set of skills are pulling $200-350k. As a result, there's a ton of money in the high end available to purchase housing in the area.
Saving for a down payment is a challenge, but less so if it's relatively easy to tuck away an extra $100k a year. This is likely available to a tech earner but not the Seattle hair dresser, unless they have also increased their asking rates for a haircut the last few years.
Were 30 year old hairdressers ever able to afford a home inside a major metro area? I'm sure one could have afforded a home in Seattle 40 years ago, but the Seattle metro area wasn't even among America's top 20 largest metros until the 70's.
The problem with the assumption that something is wrong with Seattle's housing market is that people's perceptions of what Seattle "is" haven't changed to reflect the fact that Seattle today is as large as Chicago was in 1930. No one expects a hairdresser to be able to have been able to afford property within Chicago's city center at any point in modern history. That's because everyone alive has always known Chicago to be a massive metropolis whereas many long term residents of Seattle still remember a time when the city was an also-ran in terms of size and economic prosperity. Just think of all the towns that were absorbed into what is now called Chicagoland.
People who live as far as 85 miles away from downtown Chicago (Kentland Indiana is part of the Chicago MSA) still consider themselves to live "in" Chicago and they are even included as such in Chicago's Metropolitan Statistical Area. People's perceptions of what constitutes "Seattle" need to change to reflect the current reality of the city's size and influence.
Sure, probably. The hairdresser who cut my hair when I was a child managed to buy a home in the Chicago metro area about 20 years ago. Maybe she had another source of income but I don't think so.
> A 30 year old hairdresser in Seattle isn't renting because they don't want to deal with risk - they are renting because they can't save up a $XY,000 downpayment, and tie their entire salary into interest payments.
The same applies to a 30 year old doctor in Vancouver, and I would imagine other Canadian cities soon enough.
what if the hairdresser wants to move in with a roommate? or gets married? or has kids? Or open a new shop somewhere else? There are many reasons why someone may not want to own their property, and have to deal with transacting it.
A renter's financial risk is limited to his/her lease agreement. This could be the remainder of the rent due according to the lease (ie if there are 6 months left on the lease agreement you will need to pay 6X rent). In practice typically a renter is usually on the hook for the security deposit or a month's rent, so long as they can find another renter to take over their lease.
The owner assumes the total risk for the property.
As a basic example, consider starting a lease vs buying a property in 2007. If you were a renter when the real estate market collapsed in 2008 you were stuck paying higher than the market rate (most likely) until your lease ended, at which point your rent probably dropped to market rate. No biggie.
If you bought property at the top of the market in 2007 for say $500k, and the value of that property dropped to $250k in 2008, you are now paying a $500k mortgage payment for a property worth half that amount. Rent used to cover your mortgage payment but now the market rate for rent in the same property has halved so now instead of breaking even every month on your property you have to pay $1,000 a month for someone else to live in your property just to not default on the mortgage. Odds of having to declare bankruptcy in this scenario are high.
> Odds of having to declare bankruptcy in this scenario are high.
Not at all. If you could not afford your property because of a loss of income, you are eligible for another mortgage after a short sale or foreclosure within a year. If you can't document a loss of income, its only 3 years to get another mortgage.
Temporary credit damage? Indeed, but not necessarily bankruptcy.
You risk negative returns on the property, or losses compared to your opportunity cost.
If you had $1 million in 2007, it would have been more profitable to invest it in Google than to buy a two houses in Mt View and rent them out. That is the risk the landlord is assuming. There are examples where you have a negative return as well.
That the value of the land might go down? Risk means financial downside, you can lose money on real estate on a multitude of things, millions of investors do every year.
Real estate is not as easy to diversify as stocks and bonds, certain unexpected and uninsurable external shocks can have disastrous effects on the profitability of your investment. Things such as new rent control, property tax increase, termite damage, spiteful tenants, corrupt HoA, and sudden market volatility can all cause you to lose significant money.
I'm not getting the message behind the Churchill quote, landlords clearly have operating expenses to commit towards keeping a plot of land and shelter in useful or livable condition.
If farmer renting land can decide year-to-year whether it is worth it to him to farm the land. If the renter determines that a particular lease is not profitable, he is free to do something else. The landowner has no such option; he's stuck with the land.
The renter generally pays a higher price per year than an owner but has greater options and less risk.
This is generally true of renting vs buying. If you go to distant city for a one-week vacation, you are likely to rent accommodations and a car rather than buy them. At the end of the week you can just walk away, whereas the owner must concern himself with generating an income with his property.
What risk? I bought the flat I live in to make risk lower. If you live on somebody else's property, you are more vulnerable and owner can limit how you treat the property.
I have a place to live in, while if I would be renting, I would have no more money for rent and had to move. I am not speculating on that flat with intention to sell. I live in it.
You've lost your job and were only able to get a job that paid half, how do you make your mortgage payment? If you are renting you are not locked into the property, you have the flexibility to move to a lower cost flat.
The monthly mandatory payment on my mortgage is now a lot lower then typical rent (I have freedom to pay more if I wish to). It was roughly same as rent for few years, but it went down as I paid the debt.
If my salary would go down to half and my husband would got unemployed, we would still be able to pay it. You don't have to buy the most expensive flat there is in the city. And if we were not, that would still be not that much different then not being able to pay rent.
In really really the worst case, you move to that lower cost flat and have bank take away your flat (since you aint paying mortgage it is theirs). But it is less likely to happen then being unable to pay rent because we got sick simultaneously with economy tanking.
What I'm describing is a generalization since you asked about the differences in risk between renting and ownership.
It sounds like you have taken a series of (wise) steps to significantly limit your exposure to the risk involved with property ownership. This doesn't make the rule invalid though it makes you the exception to the rule.
> In really really the worst case, you move to that lower cost flat and have bank take away your flat (since you aint paying mortgage it is theirs).
In the event of the real estate market tanking, like it did in 2008, this is not what happens in a worst case scenario. You are still liable for the cost of the mortgage you owe, if the property loses more value on the open market than the amount left that you owe on the mortgage you can't just give back the property to cancel the mortgage. You might owe $300k left on the mortgage (because you originally bought the house for $500k for example) but now the property is only selling on the market for $250k. In this scenario you can't "give back" the property because even then you still owe the bank $50k. If you can't pay, you must declare bankruptcy in addition to losing the property. So now you have no home and also your credit is so destroyed that landlords refuse to rent to you. This is a very real scenario and happened to a LOT of people during the US real estate crisis.
It’s not uncommon to find fixed-rate mortgages that are significantly cheaper than the corresponding rent for the same home. The risk is only high the first decade, and then it becomes a huge safety net.
I guess we should also consider what happens when the economy collapses and the value but not the cost of your rented living space is worth half what the landlord paid for it and you lose your job.
It depends on where you are renting. Some jurisdictions have extremely tenant friendly laws [ which is how you end up with people paying $400/mo rents for 3 bedroom apartments in West Village or in Upper East Side ], while others don't.
So what's your point? Do you want to eliminate rent? Should people who either can't afford to purchase a house, or who simply don't want to, be forced into homelessness?
Personally I've paid over $115,000 in rent over the past 12 years, but I don't begrudge my landlord their money. I attained utility in exchange for the rent I paid, and have no problem with the arrangement. Not, of course, to say that I'm happy when rent goes up. But it's a conscious choice I make to live this way, not some sort of exploitation.
He renders no service to the community, he contributes nothing to the general welfare
Housing isn't a service that contributes to the general welfare? I call bollocks.
This is distinct from a property tax in that it only measures the value of the soil it sits on, so doesn't punish the landlord for improvements. The value of the land itself is almost entirely outside of the landlord's control, it's determined by the community around it. As a result, this is one of the least distortive taxes.
> This is distinct from a property tax in that it only measures the value of the soil it sits on, so doesn't punish the landlord for improvements. The value of the land itself is almost entirely outside of the landlord's control, it's determined by the community around it. As a result, this is one of the least distortive taxes.
When land value is taxed at a higher rate than property value, it creates a perverse incentive for landlords - especially those who don't live in the area in which they own property - to encourage blighting and sabotage the value of the land, while instead reinvesting this money into improvements on the property itself. That concentrates wealth even further in the hands of people who can afford to own these insular properties in otherwise "undesirable" areas.
Actively blighting a neighborhood to depress values and make it easier to purchase land for new properties (either on the market or via eminent domain) is already a problem, and one that significantly skews power towards the extremely wealthy and massively-capitalized institutions. Taxing the value of the land separately from the property that sits on it (and at a higher rate) would exacerbate this unbelievably.
> How have all the economists missed this obvious point?
They haven't. That's why taxing land value at a higher rate than property values doesn't have support from mainstream economists.
> Murder also hurts property values. Fortunately, we have the ability to create laws to punish destructive behavior.
Murder is a lot easier to identify and prosecute than blighting. We already have laws against blighting. They don't seem to work. Increasing the incentive to blight is unlikely to make blighting less attractive.
> Why would a landlord destroy the value of their own property, harming their own ability to draw rent?
You're missing the point. They wouldn't destroy the value of their property; they'd extract value from the land (and neighboring land) to build up the value of their property. Land-value taxes encourage consolidating wealth in improvements to private property that have zero impact on anybody other than the property owner (or tenant). That's the exact opposite of the desired outcome, because it clearly works against the public benefit.
There are plenty of areas where this already happens, because there's enough of an incentive for property owners to do this even without skewing the tax code specifically to reward them for this behavior.
In some areas , it is much easier (profitable) to stuff a bunch of people into Section 8 housing, instead of trying to rent to doctors, lawyers, or software developers (i.e. people that can afford attorneys).
I admire the cashflow of trailer parks, and the ease to remove and replace distressed properties.
I would rather find some mechanism that separates everyone who wants to just earn towards a shelter that they can stick around in when they reach their old age, all into one market, and ring-fence everyone else with a profit motive into their own market where they can duke it out among themselves the real estate game.
For example, the capitalization and sophistication of commercial players lets them efficiently and systematically harangue tax assessors into lowering property taxes far below what normal individuals with just their own residential property can accomplish. Those kinds of advantages accrue in many other areas, and are out of reach of individuals due to sheer scaling differences. But it's the individuals that incur lots of collateral damage over the course of a long period.
LVT is part of a solution, but I'm still looking for a way to address that scaling differential. I think housing co-ops are onto the start of such a solution, but I'm not convinced in their current form that they are appropriate to use for addressing the scaling issue.
So, where exactly does the wealthy landlord get the money to pay the land-value tax? From their own labor? From their savings? From after-tax interest earned on their other investments? Of course not! They're going to raise the rent to cover the additional tax, and if the renter can't afford it screw them; they'll be kicked out and replaced with someone who can.
This comes up a lot in discussions involving income inequality. If the proposed solution is "tax the rich", you have to be really careful to tax them in a way that's not trivially easy to pass back onto the less-rich.
The effect of a tax on land works differently than other taxes do. Because the land value tax will free up supply (which was previously held for speculation), the result could just as easily be that rents drop. This is the entire reason that this tax is attractive, and you are right that without this feature, the tax would not make sense.
That link is talking about the effects an LVT would have on unused land that's being held for appreciation, and land that's being held as an investment. I'm talking about landlords renting property to tenants. Increasing the taxes on the landlord increases their cost, which would force them to raise the rent they charge. This is just like anything else that would raise their costs: higher insurance rates, increased maintenance costs, increased homeowners fees, etc.
Those other increases in cost do not simultaneously open up supply, though. When there can be more landlords renting out their properties, prices will fall in response. I agree it is counter-intuitive.
"Because the supply of land is essentially fixed, land rents depend on what tenants are prepared to pay, rather than on landlord expenses, preventing landlords from passing LVT to tenants."
Landlords do not set market rents. Renters and their employers do. Tax changes do not raise or lower rents. They make it more or less likely that new housing will be built, which affects future rents.
Land value taxes are so attractive because they avoid changing the incentives to build.
Of course landlords set the rent they're going to charge for their property. They're free to do so, within certain bounds established by the market and based upon the value of the property they are renting. A land value tax, which would be applied to ALL landlords in the area, increases ALL of their costs at the same time, which forces ALL of them to raise their rents at the same time. It would shift the entire market up, raising the cost of living for everyone who lives there.
Some employers might try to raise compensation accordingly, but they're going to have higher rental costs too since most employers have to rent their office space. So it's more likely that they'd be forced to reduce the size of their workforce to reduce costs and spread compensation among fewer, somewhat better-paid employees.
The impact on landlords would be immediate, and the impact on renters would be as soon as they get or renew a lease. Employers and employees would see an impact somewhat later, since it takes a while before a business is forced to downsize. Any new housing would be a long way off, well after all of the negative impacts have occurred. New housing may never come, if businesses and workers are forced out of the area to someplace that doesn't have an LVT.
Your premise doesn’t make sense. A land value tax would not “increase all of their costs at the same time”, unless the tax was implemented in such a way. More realistic would be that the tax would be revenue neutral, such that taxes would increase per unit dwelling on land with poor utilization, but decrease on land with better utilization (i.e denser). This would be reflected in rents and would encourage people to move to denser neighborhoods because the rents would be cheaper.
I don't understand how a land value tax is supposed to make rents lower. It doesn't really compute.
As a landlord, I have a mortgage of $X and taxes of $Y, and insurances, maintenance and other liabilities that total up to $Z, for operating costs on a piece of property.
For this to make any sense at all, $Rent >= $X + Y$ + $Z.
If you increase the taxes $Y (and this would, realistically, be done more or less uniformly across a town or municipal region, so all properties are going to be in the same boat), all you've done is make me have to charge a correspondingly higher rent. Rounded up to the nearest $25 or $50, because that's how it is always done. Meanwhile all the other owners of rental properties are in the same position.
Here's a brief description of how the increase in land value is calculated: "Under this system, when real property is purchased, the county assessor assigns it an assessed value that is equal to its purchase price, or “acquisition value.” Each year thereafter, the property’s assessed value increases by 2 percent or the rate of inflation, whichever is lower."
I think what the 2% appreciation cap is attempting to mitigate is if all your tech millionaire IPO neighbors decide to remodel their houses at once, you won't be stuck with a huge tax bill and have to move.
What you describe is California’s Proposition 13. It does essentially the opposite of the Land Value Tax that the parent is advocating. The acquisition value system and 1% cap ensure that land investors (rather than local governments) capture the windfalls from the appreciation while they own the property. The split roll for land vs. new construction taxes new construction at a higher rate (rather than the lower 0% under the Land Value Tax) so Proposition 13 discourages (rather than encourages) investing in improvements.
Agreed. Just highlighting to some degree it exists already and as not a novel untested concept. It just needs refinement.
A phased, gradual raising of the 2% cap probably would make sense over a couple of decades. That way homeowners and developers can adequately prepare and build in that rate increase into their economic models. Building lifetimes span multi-decades.
Please explain how this additional tax isn't immediately (at the next least signing) passed on to renters. If I rent out a property and the taxes go up $X, I will raise rent at least 1x.
Econ 101 supply and demand.
Why haven't you _already_ raised rent $X? Because you love your tenants? If landlords kept down rents out of _charity_, we wouldn't have a rent problem in the first place.
Except all rental properties in the region would have to pay similar amount of land tax, so they would all raise the rent and the renter would have to choose either pay the higher rent or move to a cheaper area.
In California at least, the property tax bill is already split into two components:
1.) Tax on land value
2.) Tax on improvements (building, landscaping)
so Georgism already exists somewhat.
An land value tax increase would need to be phased over decades to account for the building lifetimes which can span 50 or more years. Developers use multi-decode economic models for their developments based on assumptions including worst case property tax scenarios. But if that can change at moment's notice.
It also would need to account for zoning restrictions. If some parcels get re-developed as ultra high density housing but NIMBY's block similar developments in neighboring parcels, that could lead to lawsuits against the county.
My property tax bill in California does have the breakdown of the land value and improvements, but they are just added together and a single rate is applied to the total (~%1.3 in my case). So one could implement Georgism pretty easily, by just taxing the land value, but that is not how it works at the moment.
EDIT: @ mcbruiser3: When I say "we" (which I removed above), people who share my progressive political view that people/humans/"labor" should be treated with priority over capital and rentseeking.
As a landowner, I would happily discard the mortgage interest deduction. And 1031s and depreciation allowances. Oh and toss California's Proposition 13 as well.
In exchange, I would request a dramatically simplified tax code that avoids mechanisms such as these across the board. And reduced zoning regulations to allow more housing supply.
Coops acquiring property for renting to citizens when possible
Yes, this sounds like a good idea. As a Libertarian, I like this model because it is compatible with private property rights, and doesn't demand some sort of government intervention.
They already do, at least in NYC. That's just part of the deal you sign when you join. If you don't like it, there are a lot of other options, each with their own tradeoffs.
Perhaps, but as long as participation is voluntary, I can live with that. That said, if I ever buy a house, it will very pointedly be in an area with no HOA. :-)
please feel free to start up a coop then. nothing is stopping you and your friends from doing that. have at it, and good luck.
edit: apparently some people don't like this comment because it means you have to help yourself instead of the gov't giving you other people's money. get a life.
Allow people to deduct rents paid from their income taxes if they report the location of the property and the identity of the party receiving the payments (in addition to the standard deduction).
Tax income from rents at a higher rate than wage and salary incomes.
The landlords will obviously just raise rents to pay the tax, but this allows you to gather data on who owns/manages all the rental properties, which are the sort of data you need to determine if rents or absentee-landlordism is even a problem anywhere.
In response to the parent, the landlord is not providing housing. The people who live in the housing provide the demand for housing. The home construction industry provide new supply, and owners of existing housing stocks may be enticed to sell once their price point is reached. A landlord that buys a house with the intention to rent to someone else is acting as a middleman. If they did not bid up the price of that particular house, the price might have remained low enough for someone who intended to live in it to buy it.
So what the landlord actually provides is the ability to buy a small interval of living in a home, rather than having to buy all the years of living there--from now until the fall of civilization--all at once. Mortgages are a different sort of middleman. They provide the ability to spread out that payment for all the remaining years over a fixed number of years. But the interest on a home mortgage is mostly just another form of rent-seeking. Without the availability of the mortgages, the houses would have to sell at lower prices, to those who could afford to pay for them.
The problem, if there is one, is not that rent-seekers take rents, but that they do not spend those rents close enough to the people who give them for them to easily earn them back. If you rent out the loft above your garage to a single student, you're likely to spend some of that money at the restaurant where they bus tables part-time. That money circulates back through the local community. If you live in St. Louis and own a 3/2 in Tulsa, maybe the customer support line of the juice press you bought runs its call center out of there. That money leaves faster than it comes back. And if your retirement plan owns part of a REIT that owns rental property all over, and also has a bit invested in Freddie Mac and Fannie Mae, that's basically a diffuse sucking of money out of the entire rest of the country to feed a diffuse scattering of investors that don't necessarily live anywhere near the sources. The circulation loop is totally broken. People stand at the nexus ("Wall Street") and skim off the top, then don't spend that money back into the communities where the rents come from.
This is how an Appalachian ex-miner family can rent a drafty barn with no furniture for $300 a month, and not see any local jobs available to recirculate that money back to them. The owner doesn't live there, or spend money there, or even spare a single thought when their plane flies overhead. The only reason they own the barn is to extract the Social Security Disability money that flies in from Washington, DC, briefly touches earth, and then immediately flies away to a community where people own things for their living.
Something like a Georgist land-value tax does not meaningfully distinguish between a landlord that lives next door and spends all their rent locally and one that lives 12 time zones away and spends it all to people much more distant on the money-circulation graph. Perhaps it would be more appropriate to tax rents based on the distance between the beneficial owner's legal domicile and the property? Composite entities like corporations and partnerships would then have to report their domicile and distance calculations for distributions and dividends though. Seems like a mess for reporting.
This comment doesn't stand up to scrutiny. There aren't a lot of available statistics on how wealthy landlords are, but for instance, according to a San Francisco property owners survey[1], median income for landlords is $90k, only 15% higher than the overall San Francisco median income ($77k). And of course a software engineer's median income in San Francisco is higher ($92k). Either way, there is little evidence that in one of the hottest real estate markets in the country, landlords would be 'substantially' richer than tenants on average.
Of course, income is only a component of wealth--no doubt the property owned is worth quite a bit--but, according to the same report, at least 75% of these landlords are still paying mortgages on their properties, and over 10% spend more than their rental income on their mortgages!
Since most landlords borrow money to buy property, then attempt to sell access to that property profitably over time, they are more like entrepreneurs than the land baron 'monopolists' portrayed by the Churchill quote above.
This isn't wealth redistribution in any direction. It's a trade. Renters get access to property without having to own it. Owners, if they are smart and/or lucky, can profit from property, but of course take a substantially larger up front risk.
And, I would be remiss if I didn't point out that Winston Churchill was from one of the wealthiest British aristocratic (read: rentier landowning) families and was born in the family home, this palace[2].
You didn't challenge the statement to GP made, but one he didn't make. He didn't say that landlords are vastly richer than workers. He said that landlords make little or no contribution to the general welfare.
Your own comment points out that in SF, the median landlord makes roughly what the median software developer makes. But a software developer in the Bay Area is one of the most productive workers on the planet, with a literally unparalleled opportunity to generate value, both for the company he works for, and for global society/consumers in general. In contrast, the landlord does not produce anything.
Because the community has agreed to honor their exclusive real property claim, even if another person might have made better use of it.
Property owners do occasionally have their property seized by the community that it may be used more appropriately to the community's desires. It may be by eminent domain, or civil forfeiture, or adverse possession, or by regulatory taking, or some other means, but it is more likely to happen to those that do not actively demonstrate value to their community (perhaps in the form of financially supporting the local lawyering economy, if nothing else) than those who do not.
It's a fact of existence from the Pauli Exclusion Principle all the way up to "wherever you go, there you are" that everything has to have a place to be. You can't have a general welfare without a place to put it, and wherever you put it has to be adjacent to other places.
So that special obligation is basically to not abuse the inevitability of adjacency and the tyranny of distance in a way that is too obviously selfish.
I'm having trouble understanding your comment. The entire principle of private property ownership on which (arguably) our entire civil society and economy is based is that one may use said property as one wishes. It doesn't really matter if another person might have made "better use of it". The only opinion that matters on how the property might best be used is the person who owns it. It's not a community decision, excepting the narrow cases you outlined.
Private individual ownership has never been absolute for anyone, except for those despots and monarchs with a large and loyal military. There have always been ways for a large group of people to strip an intransigent and selfish person of his property, and some of those ways don't involve murdering him in a public and humiliating way. If nothing else, a series of successful civil suits can force the transfer of real property to the plaintiffs.
Eminent domain is one establishment-sanctioned way in the US, wherein the owner is forced to sell to the government. The purpose is supposedly to enable construction of public infrastructure such that private owners cannot obstruct for personal profit, but the controversial Kelo v. New London case involved the use of eminent domain to transfer property from one private party to another.
If your style of ownership is a clear burden on the surrounding community, they will eventually strip you of your property. But the bar is set rather low, even for the minorities in a racist community. As long as you pay your property taxes, obey the most literal interpretation of the law, and don't allow the property to look too bad from the curb, people will generally leave you alone.
So the duty of the landlord is to not be such an enormous ass that the community notices it, and comes after them. It isn't difficult, let some people can't even manage that.
Yes, if only history could stop in 1776. Then we can all make overarching general comments on how things are and will forever be. 240 years are a joke.
The landlord produces a place for people to stay. Why is that "nothing"? I've rented. I didn't like paying rent every month, but it beat sleeping in my car.
Do you think the landlord should provide apartments for free?
Returning to Churchill's statement: Every one of those improvements improves every landowner, whether a landlord or a homeowner. For every one of them, they have done nothing - except pay taxes. (But note that the landlords pay taxes too.) So why single out the landlords?
The investor capitalized the builder, and the builder constructed the housing, and the lender capitalized the landlord, and the landlord bought the building, all because they knew that people need to have a place to exist, and that the spot they picked was a likely spot.
If renting were somehow not allowed, none of them would have any use for that spot. There would not be that same building there, but there is the possibility that there would be a 12 bed + 1 outhouse shanty/bunkhouse there instead, which would also be better than sleeping in your car, but only just barely. And the cost of your kip would be much less.
There is also the possibility that instead of just one 3200 sq.ft. house with grass-covered yard, there would be a low-rise tenement-style condo-plex with 8 units at 1600 sq.ft. each, with limited covered parking and no lawn. With enough of those on the same street, there might also be a bus stop nearby, and competition among local utilities.
But by defining that plot as one place for one family to live, the landlord and his financiers has ensured that no matter how big it is, it is too expensive for the renter to easily buy it. If the landlord did not exist, that plot would have to be divided into as many places as is necessary to bring the price down to what those who will be occupying those places can afford to pay each other to stay out of someone else's spot.
Renting is a service, of course they don't produce anything. If they weren't providing a service people found valuable (i.e. improving their general welfare) much fewer people would be renting.
The point is that the landlord becomes wealthier through improvements to the area, for which s/he is not responsible. i.e. they are capturing public investment.
Put concretely, my taxes go towards upgrading the Overground Line which improves the area I live in which increases my rent. I have paid for this improvement twice, my landlord, zero times (their get back their taxes through uplift in property value).
Solution - as others have pointed out - is Land Value Tax.
The landlord has to pay higher property taxes as their property becomes more valuable, which often go in turn to paying for those improvements. It's not a one-way transfer, there's a quid pro quo. Now you may argue landlords get more than they give, but that's an entirely different point.
True in most places. California's prop 13 caps property value increases for tax purposes to 2% per year. This includes land held by corporations, not just grandma.
I don't think medians are the right thing to look at here. The majority of individual landlords will be small-time, but it's the behavior and impact of the largest landlords that is important.
That quote is the exact reason that land needs to be taxed at a much higher rate than it's currently taxed. Notice I say "land", so that doesn't include anything built on that land.
The value of land is directly tied to the desirability of the land around it. Land in Manhattan is more valuable than land in the middle of South Dakota because of all the network effects of other people (and the government) building things in Manhattan.
> That quote is the exact reason that land needs to be taxed at a much higher rate than it's currently taxed. Notice I say "land", so that doesn't include anything built on that land.
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> The value of land is directly tied to the desirability of the land around it. Land in Manhattan is more valuable than land in the middle of South Dakota because of all the network effects of other people (and the government) building things in Manhattan.
I'm glad you mentioned Manhattan.
Land-value taxes encourage property owners (or aspiring property owners) to take actions to decrease the value of land, in order to make it cheaper to acquire and maintain (read: pay taxes on) that land. Those actions have significant network effects, much more so than actions that increase (or decrease) property values, by definition: the value of land is more strongly correlated with the value of neighboring land than the values of properties are.
Taken to the extreme, this will cause massively capitalized institutions to blight land - and, in some cases, even buy up land for the specific purpose of blighting it and reducing its value (thereby reducing the value of neighboring land). That results in a massive wealth transfer from the poor and middle class to wealthy institutions - namely banks and universities with large endowments, though sometimes wealthy individuals too.
I'm glad you mentioned Manhattan, because it's one place where this exact practice already happens in a very public and visible way. It happens in Manhattan even without the existence of specific tax incentives to encourage this behavior because the economics of real estate in the area (along with other aspects of real estate acquisition in NYC) make it profitable for institutions like NYU and Columbia to do this[0]. If you started taxing land at a higher value than the property that sits on the land, it would make it lucrative for "smaller" institutions (ie, other well-capitalized institutions) to start doing it as well.
[0] NYU and Columbia are two of the top three holders of real-estate in the city, by value. They have both engaged in this practice in very visible and documented ways.
Part of your premise here seems logically incorrect. If land-value taxes is more heavily affected by neighboring properties then they should actually be harder, not easier, to manipulate since this is a two way asymmetrical situation. For any given amount of blight property values should lower by a larger percent than land values
Do you have proof of this? What are these visible and documented ways?
I'm not certain I completely understand your argument. Basically every explanation of LVT that I've come across says that it will decrease the amount of blighted land, as a land-value tax increases the incentive for landowners to improve their land.
And what you received in exchange for that was a lifetime of not being homeless, having no maintenance or (immediate or direct) tax responsibilities, and the freedom to leave without having to sell an expensive, illiquid asset.
If you bought your home 5 or 6 years ago, then your mortgage is most likely lower than the market rent for it. I have friends in this exact situation. New job and moving in 30 days. Off to a property management company where somebody else will pay the mortgage for you.
I don’t think many landlords get rich from rent but housing appreciation. Real estate cap rates are generally very low, especially in places where rents are high. Take nyc for example. If you look at what someone pays for rent and take an estimate as to what the apartment is worth and estimate mortgage and taxes you’ll see that the rent often doesn’t even cover the mortgage.
For instance in manhattan you can get a cheap studio for maybe 2,200 a month. That studio would cost easily 600k, and at 4% interest (higher for investment property) the monthly payment not including taxes and maintenance is nearly 3k. That’s not even mentioning other barriers like the fact that a condo would likely be double the price and a co op would likely prevent you from renting and require a large down payment.
Sure, but to make money on housing appreciation you also run the risk of losing money on housing depreciation. Given that owning property is a risk, it's not a fair characterization to look at landlords as some sort of leech on society that just get rich at the expense of everyone else. That's survivorship bias looking at only the successful landlords and ignoring the real risk involved in owning property.
> Given that owning property is a risk, it's not a fair characterization to look at landlords as some sort of leech on society that just get rich at the expense of everyone else.
Every landlord I've paid rent to or some acquaintances of mine who own rental properties seem to all have more than a few rental properties. And I've never seen/heard of rental property owners going bankrupt. Yes some do, but they do so because they stretched themselves way too thin.
It's an anecdote but pretty much any family that seems to live well without the breadwinner working 70-80 work week as a doctor/lawyer seem to have rental properties. It is the most stable/lucrative use of one's wealth. It's been that way for a long time.
You obviously don't own a home. There absolutely are financial implications for the value of your home dropping after you buy it.
A) An already illiquid asset is more illiquid. Not only do you need to find someone willing to buy it, you either need to pay to sell it, or find someone willing to pay above market.
B) Decreased access to capital. HELOCs are one of the few ways the middle class has to access six figures of credit easily and cheaply, and this is eliminated when banks won't go above 60-80% LTV but you live in a house with $x with a mortgage balance of 1.5x.
Regarding A, do banks ever make "margin calls" when homes drop in value? I mean, force people to sell even though those people have an income and are making mortgage payments? (If so, why, when the mortgage income, if it continues, is worth more than what they can get from the foreclosure?)
I can't speak for every situation, but I know that my mortgage doesn't include any terms like that. The bank could foreclose and sell the property only if I stopped making mortgage payments.
I think that what you're describing would be termed a "technical default", and would require a clause called an "affirmative covenant".
Municipal tax based on the value of the property, due every year
But then again, if people they can't afford the rent, they won't pay (or they find different arrangements), landlords who think their tenants have infinite money are in for a (bad) surprise
If this is true, why is the return on owning land not better than the return on the stock market, at least in the estimation of most economists? Unless you have some comparative advantage in owning/administering to land, it's not actually such a sweet deal relative to normal investing.
Owning land is "free money" in that you tie up your wealth and in exchange get interest. Same deal with owning stocks. Land isn't special, nor is it really helpful to view it as a "redistribution of wealth upwards" in my opinion.
http://www.investopedia.com/ask/answers/060415/what-average-... "By any measurement, the real estate sector has outperformed the overall market, even factoring in the drastic collapse in housing prices during the 2008 financial crisis." (I'm not an expert but I recall hearing that much of the recovery from the recession went to real estate owners.)
Granted, every investment vehicle under the sun will have its ups and downs. It's a plausible case that real estate is worth having for its purported counter cyclical properties in some sort of advanced and complicated investment portfolio. From none of that does it follow that owning real estate is some sort of reverse scam where the owners are reaping incredible and reliable riches off the backs of the poor renters as the person I was replying to implied.
Because this truism is based on a long period of history, whereas real estate blowing most every other investment out of the water especially when you consider you're usually working on 90% leverage, is a relatively recent phenomenon. I continue to be of the opinion that a major driver of this is the rise of China.
If I understand correctly, in the United Kingdom, there are no property taxes. Instead, there are council taxes - but they are paid by the tenant, not the landlord!
Now, while most of the rest of the world has property taxes, I would argue that they are far too low.
Yeah, it's a stupid situation. There's a property transaction tax, "stamp duty", which can be surprisingly high ( http://www.knightfrank.co.uk/stamp-duty-calculator ) but of course that really ends up protecting incumbents rather than taxing them.
Why would you want to tax sales of property? That just makes the market more illiquid, as well as making it more expensive to increase density (because you now to pay an extra a fee if you want to buy a single family house to replace with an taller building).
"Always enjoyed this Churchill quote - from 1909!"
(long quotation from 4 years prior to the 16th amendment[1])
This is not an accurate assessment of the present state of affairs. Rental income in the United States is taxed at the federal and state level and rental licenses (as well as other licensing) is levied at the local level.
This is not to mention the property taxes that are paid by the landlord - which can be significant.
Your landlord is contributing to the general welfare in a great many ways.
The renter actually pays the property tax, it's included in the rent that is charged. There are very few landlords who rent out their property for less than the cost of property tax.
Further many residential properties are owned by LLCs and other corporations that allow them to lock in low taxes by never selling the actual property, but merely the holding company of the property.
"Further many residential properties are owned by LLCs and other corporations that allow them to lock in low taxes by never selling the actual property ..."
I think you are talking about prop 13 and the ability of corporate entities to benefit from the provisions of prop 13 which I agree, is completely insane.
But prop 13 is limited to California and I know of no other states that have anything comparable.
The £ sign tells me you are trapped in the overpriced housing country, forced to watch Kirstie Allsop be all smug about house prices.
I wonder what if lots of people said f the rent, f the prices let's just go travelling, live in a caravan, enjoy life. Settle in an affordable country. Not be a sheep toiling away to pay for someone else's Ferrari.
Yes, but you need to realize that land plays a crucial role in our environment and rich people are in a better position to utilize resources with attention to environment than poor people. All the zoning laws that make rents high are actually good for environment and help us fight climate change.
Do you not also buy food and clothing from companies owned by people richer than you? I feel like the main difference with rent is that the owners aren't that much richer than we are, and sometimes we meet them face-to-face, so the relationship is more comprehensible.
I love how some folks complain about paying rent as if they have no choices, as if they're somehow indentured servants or serfs beholden to the landed gentry or something.
The truth is you do have choices, even in tough times. Find a way to save money for a down payment and buy some property. Maybe even become a landlord yourself.
If you've got a way to save up some 10's of thousands of dollars for a down payment in a reasonable time, and be able to pay the mortgage for the loan, that doesn't sound like "tough times" to me.
I bought 7 years ago, when the market in my area was at its lowest. Saving for years, on an income significantly above median (for the area), I was just able to afford a down payment on a starter home.
Most people in my area make less than me, and the market has significantly picked up. My next door neighbor just sold their place, smaller and less upgraded than mine, for about 1.5x what I paid for mine. And the people that couldn't pay 2/3 that price 7 years ago should have just tried harder to save up to afford it now, right?
Well, people have to live somewhere. And it is fair to complain if you think the land holders who came before them are not paying enough property tax, which seems to have caused the housing prices to get so high. "Every proprietor owes to the community a ground rent for the land which he holds" - Thomas Paine
Always enjoyed this Churchill quote - from 1909!
Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains -- and all the while the landlord sits still. Every one of those improvements is effected by the labor and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.