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I really liked this article. I had a question about it. Could there be a case where existing unpleasant rental properties in highly dense urban cities suddenly

I really liked this article. I had a question about it. Could there be a case where existing unpleasant rental properties in highly dense urban cities suddenly have negative rental value? For example, imagine there was a run-down house that is livable, but is one of the most undesirable in SF. Adjacent to it, let's say there's a shiny desirable house with the same land characteristics. If I understand correctly, these 2 apartments would have the same land value tax right? What kind of effect will this have on the rental price of the bad house? What will dictate the floor of it? - Would it be the cost of the LVT? - Would it be the lowest rent transaction that occured in the market? - Would it be zero? If it is one of the last two, I can't imagine the land-owner renting it out except for speculation on the desirability of living in SF right?

larsiusprime 5y ago
So you're basically describing the slumlord situation. Let me grab a figure from the book review: https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F8b57ab87-8422-437f-b6c4-f3ccdd223624_1022x597.png https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q... So imagine that the return from land was taken away. The only thing a landlord can charge rent on now is providing a nice building (capital) and good service & maintenance (labor). The first property, "a nice house" would be able to charge rent -- because it now has value above the value of an empty field. The second property, an empty lot, would be able to charge approximately nothing (the government collects the land rents, and this is capitalized into the price such that you can't charge any additional rent above that). And yes, the third property (teardown property) you'd have to actively pay people to occupy, because you can't charge for access to the land, and the place sucks and is hazardous to your health. What's the incentive in this situation for a landowner who wants to make money? Build something good (capital) and provide good service (labor), both are things we want to encourage. Of course, the above assumes that land value taxes are fully capitalized into land prices and thus can't be passed on to tenants. This isn't discussed in this article (Part I) but will be discussed tomorrow in Part II.
- davjhan 5y ago
  Thanks for the concise explanation! You must be the original author. I've shared the article with many friends. A few follow up questions: - I'm interested to see how this affects multi-family housing. Do the same mechanics come to play? In an apartment complex, I assume that the positive or negative value of the property would be way greater than the land value, no? - Do the resulting effects of the 3rd property only apply for teardown and straight up unliveable properties? Or would it be the blanket bottom x% of all houses in SF? If it was the latter, could this count as an inefficiency under the proposal? As "bad but livable" units today are now taken off the market? - Does the "good house" now lose re-sale value now simply by virtue of being next to a "bad house"? Let's say that the house issues are internal, and the outside is fine. Is this okay? Looking forward to part II. If these questions get answered then, I'll just wait until I read it and ask more questions.
  - larsiusprime 5y ago
    Yup, I'm the author. - As far as I know, yes, LVT would definitely incentivize multi-family housing over single-family housing. - I'm not sure exactly where the threshold would be. Under current market conditions where landlords can collect land rents, it'd be any place where the property is so bad that the rent is less than you'd be able to collect if it were, say, a parking lot. This might still be a good investment for the slumlord because the presence of the teardown property has negative value and makes it cheaper to buy than if it were just an empty lot, and then they just refuse to fix anything and collect the land rents. - Not 100% sure what you're asking but maybe I can answer it this way -- So locational value comes from the activity of your neighbors. That's why "location, location, location" is a thing. If you're in a good neighborhood, your land value goes up because it's a nice place to be and people will pay more for that privilege. If there's, say, a crackhouse next door that will depress your land value for obvious reasons.
    - davjhan 5y ago
      Thanks for the responses. To clarify the last question, my house value would be affected if it was known that my neighbor will undergo a construction project. So I was just wondering that if the rise in propensity to teardown increased under LVT, that it would have weird ripple effects of devaluing the land of the good house by virtue of it being next to a future construction zone.
runnerup 5y ago
In areas of housing shortages, the rent with LVT would be whatever it currently is without LVT. Theoretically, landlords are already extracting the maximum rent price possible in housing-constrained markets like NYC/SF/etc. What would change is that the land-owner would make less profit. Potentially, a unit which is currently renting for $1100/mo in Manhattan might be assigned an LVT of $1500/mo. In that case, the landowner will lose $400/mo. However, if they stop renting it out, they will lose $1500/mo. The rational thing to do would be to improve the accommodations so that someone would be willing to pay $2000/mo to rent it. Then the landlord would profit on the improvements they made (rather than profit on merely owning high-value land). They would be rewarded for the value they added on top of the land.
- davjhan 5y ago
  I see. Could it be possible in areas like Detroit where the cost of renovating the house for profitability is just too prohibitively expensive that the house itself just isn't sellable? Could home-owners now somehow be stuck in situations where they are forced into debt by holding a property that just sucks money out? Especially if implemented too suddenly?
  - runnerup 5y ago
    Ideally in low-value areas like Detroit, the land tax would be low as well. A "negative rent yield" situation should generally "only" occur where, for an extreme example, you could put a skyscraper to house 4,000 people on the land, but instead put a brownstone to house 4. There you might be taxed at the same land rate as the skyscraper next door, if skyscrapers were ubiquitous in that neighborhood. If you were fabulously wealthy, you could choose to maintain your single-family brownstone there and simply pay the millions in annual taxes. The local school district wouldn't notice a difference. But most landowners would decide to partner with a developer and build a skyscraper so that they can earn more than the LVT, which should lower rents for the laborers in that city. > Could home-owners now somehow be stuck in situations where they are forced into debt by holding a property that just sucks money out? Especially if implemented too suddenly? Yes. As could large commercial real-estate holders. The reason is simple: if you raise taxes, the resale value of the land will be lower. A graduated implementation could help a bit, but the final "price" will still get instantly priced in with a bit of a time discount. Proponents of Georgian LVT are generally comfortable with lowering the resale prices of real-estate. They may underestimate the degree of the change, or misjudge the wider effects of most properties suddenly being worth less. However, proponents generally don't like the idea of people earning their retirement just by holding land. So the first-order effects on resale prices of land are more of a feature than a bug. I'm not entirely convinced that second- and third- order effects wouldn't be potentially devastating. I believe if the nation had been founded with a Georgian LVT things would have worked out much for the better! But I'm afraid of how much of our economy we have precariously perched on infinitely rising land prices.
pydry 5y ago
>For example, imagine there was a run-down house that is livable, but is one of the most undesirable in SF. Adjacent to it, let's say there's a shiny desirable house with the same land characteristics. If I understand correctly, these 2 apartments would have the same land value tax right? >What kind of effect will this have on the rental price of the bad house? What will dictate the floor of it? The bad house would have the same rent it would without LVT. The only difference is that the landlord would be making a loss if the house is too shitty or too low density. The landlord is then faced with 4 choices - 1) make eye watering losses by not renting it out. 2) continue to make losses renting it out, 3) sell up to somebody who will redevelop, 4) redevelop themselves. LVT should put upward pressure on the quality of housing (and density in big cities) because landlords will eat losses if they don't. You'd probably need separate rules for historic buildings (e.g. an LVT discount) since it will become an amplified driver to knock them down and replace them with high rises without some impediment from doing so.

larsiusprime 5y ago

So you're basically describing the slumlord situation. Let me grab a figure from the book review: https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F8b57ab87-8422-437f-b6c4-f3ccdd223624_1022x597.png https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q... So imagine that the return from land was taken away. The only thing a landlord can charge rent on now is providing a nice building (capital) and good service & maintenance (labor). The first property, "a nice house" would be able to charge rent -- because it now has value above the value of an empty field. The second property, an empty lot, would be able to charge approximately nothing (the government collects the land rents, and this is capitalized into the price such that you can't charge any additional rent above that). And yes, the third property (teardown property) you'd have to actively pay people to occupy, because you can't charge for access to the land, and the place sucks and is hazardous to your health. What's the incentive in this situation for a landowner who wants to make money? Build something good (capital) and provide good service (labor), both are things we want to encourage. Of course, the above assumes that land value taxes are fully capitalized into land prices and thus can't be passed on to tenants. This isn't discussed in this article (Part I) but will be discussed tomorrow in Part II.

davjhan 5y ago
Thanks for the concise explanation! You must be the original author. I've shared the article with many friends. A few follow up questions: - I'm interested to see how this affects multi-family housing. Do the same mechanics come to play? In an apartment complex, I assume that the positive or negative value of the property would be way greater than the land value, no? - Do the resulting effects of the 3rd property only apply for teardown and straight up unliveable properties? Or would it be the blanket bottom x% of all houses in SF? If it was the latter, could this count as an inefficiency under the proposal? As "bad but livable" units today are now taken off the market? - Does the "good house" now lose re-sale value now simply by virtue of being next to a "bad house"? Let's say that the house issues are internal, and the outside is fine. Is this okay? Looking forward to part II. If these questions get answered then, I'll just wait until I read it and ask more questions.
- larsiusprime 5y ago
  Yup, I'm the author. - As far as I know, yes, LVT would definitely incentivize multi-family housing over single-family housing. - I'm not sure exactly where the threshold would be. Under current market conditions where landlords can collect land rents, it'd be any place where the property is so bad that the rent is less than you'd be able to collect if it were, say, a parking lot. This might still be a good investment for the slumlord because the presence of the teardown property has negative value and makes it cheaper to buy than if it were just an empty lot, and then they just refuse to fix anything and collect the land rents. - Not 100% sure what you're asking but maybe I can answer it this way -- So locational value comes from the activity of your neighbors. That's why "location, location, location" is a thing. If you're in a good neighborhood, your land value goes up because it's a nice place to be and people will pay more for that privilege. If there's, say, a crackhouse next door that will depress your land value for obvious reasons.
  - davjhan 5y ago
    Thanks for the responses. To clarify the last question, my house value would be affected if it was known that my neighbor will undergo a construction project. So I was just wondering that if the rise in propensity to teardown increased under LVT, that it would have weird ripple effects of devaluing the land of the good house by virtue of it being next to a future construction zone.

runnerup 5y ago

In areas of housing shortages, the rent with LVT would be whatever it currently is without LVT. Theoretically, landlords are already extracting the maximum rent price possible in housing-constrained markets like NYC/SF/etc. What would change is that the land-owner would make less profit. Potentially, a unit which is currently renting for $1100/mo in Manhattan might be assigned an LVT of $1500/mo. In that case, the landowner will lose $400/mo. However, if they stop renting it out, they will lose $1500/mo. The rational thing to do would be to improve the accommodations so that someone would be willing to pay $2000/mo to rent it. Then the landlord would profit on the improvements they made (rather than profit on merely owning high-value land). They would be rewarded for the value they added on top of the land.

davjhan 5y ago
I see. Could it be possible in areas like Detroit where the cost of renovating the house for profitability is just too prohibitively expensive that the house itself just isn't sellable? Could home-owners now somehow be stuck in situations where they are forced into debt by holding a property that just sucks money out? Especially if implemented too suddenly?
- runnerup 5y ago
  Ideally in low-value areas like Detroit, the land tax would be low as well. A "negative rent yield" situation should generally "only" occur where, for an extreme example, you could put a skyscraper to house 4,000 people on the land, but instead put a brownstone to house 4. There you might be taxed at the same land rate as the skyscraper next door, if skyscrapers were ubiquitous in that neighborhood. If you were fabulously wealthy, you could choose to maintain your single-family brownstone there and simply pay the millions in annual taxes. The local school district wouldn't notice a difference. But most landowners would decide to partner with a developer and build a skyscraper so that they can earn more than the LVT, which should lower rents for the laborers in that city. > Could home-owners now somehow be stuck in situations where they are forced into debt by holding a property that just sucks money out? Especially if implemented too suddenly? Yes. As could large commercial real-estate holders. The reason is simple: if you raise taxes, the resale value of the land will be lower. A graduated implementation could help a bit, but the final "price" will still get instantly priced in with a bit of a time discount. Proponents of Georgian LVT are generally comfortable with lowering the resale prices of real-estate. They may underestimate the degree of the change, or misjudge the wider effects of most properties suddenly being worth less. However, proponents generally don't like the idea of people earning their retirement just by holding land. So the first-order effects on resale prices of land are more of a feature than a bug. I'm not entirely convinced that second- and third- order effects wouldn't be potentially devastating. I believe if the nation had been founded with a Georgian LVT things would have worked out much for the better! But I'm afraid of how much of our economy we have precariously perched on infinitely rising land prices.

pydry 5y ago

>For example, imagine there was a run-down house that is livable, but is one of the most undesirable in SF. Adjacent to it, let's say there's a shiny desirable house with the same land characteristics. If I understand correctly, these 2 apartments would have the same land value tax right? >What kind of effect will this have on the rental price of the bad house? What will dictate the floor of it? The bad house would have the same rent it would without LVT. The only difference is that the landlord would be making a loss if the house is too shitty or too low density. The landlord is then faced with 4 choices - 1) make eye watering losses by not renting it out. 2) continue to make losses renting it out, 3) sell up to somebody who will redevelop, 4) redevelop themselves. LVT should put upward pressure on the quality of housing (and density in big cities) because landlords will eat losses if they don't. You'd probably need separate rules for historic buildings (e.g. an LVT discount) since it will become an amplified driver to knock them down and replace them with high rises without some impediment from doing so.