Today’s first post1 talked about plans to unlock housing supply in Ontario. It explores why the provincial government’s analysis of the issue is leading to solutions that could make worse the crisis in the supply of affordable housing.
Land price is a piece of the puzzle. But discussions often fail to make mention of how residual land value affects the price of land.
Imagine you are considering buying a parcel of land. All the experts say that you should base your offer on the residual land value. Residual value is what is left over after you’ve covered the transaction costs, financed the purchase and extracted a profit. You don’t want to pay more than this residual value because you will be out of pocket.
But parcels of land don’t exist in a vacuum. There are other transactions and developments going on all around the land you have your eye on.
So as a buyer, a consideration when figuring out the residual value is what will happen to the value of the property after you buy it. If there’s a good chance you could boost your post-purchase profit by adding more units, then you would consider making a higher bid for the land you want to buy.
And if you’re the person selling a property, that new condo that just got approved around the corner will push up your expectations of what you should receive for the property you’re selling.
In this context, calculating residual value becomes a version of FOMO (fear of missing out). As the buyer or a seller, pricing it ‘right’ will maximize the value you reap from the transaction. It gives a considerable incentive to raise the value of the land for both parties in the transaction.
Public decisions can radically affect a property’s residual value. A piece of property in a green belt has much more possibility to boost its value if it is approved for residential development. Placement of public transit corridors have the same effect. In both cases, without making any changes to the property, its value increases.
These processes should beg a question for decision makers and policy makers: how to distribute the resulting increase in land value2? The rest of this post is given over to this question from three different perspectives: that of advocates, of political parties and of academic research.
Housing Advocates
East Bay Housing Organizations (EHBO) is a housing advocacy coalition for Alameda and Contra Costa Counties in California. EBHO commissioned a study of ways to distribute the financial benefit of pubic decision-making. EBHO is specifically interested in housing that is affordable to area residents with low incomes. The intended beneficiaries of EBHO’s work are Black people, people of colour, seniors, newcomers, youth, single parents and kids in low income families. The study includes a range of methods that four local governments are using to ensure that some of the wealth gained through zoning and public transit decisions shows up in new housing for people who are being squeezed out of the market. The report is published by EBHO: White Paper On The Theory, Economics And Practice Of Public Benefit Zoning
Here’s another story from advocates who are working to ensure there is housing for people with very low incomes, this time from Boston. Read more in Next City3: An East Boston Tenant Fought Her Eviction For 8 Years. The City Bought Her Building And 35 Others.
A Political Perspective
This is advice offered to the Labour Party in the United Kingdom. This report analyses the sources of high land values and sets out a program to restructure the way that wealth from gains in property value is distributed. It has a broad scope, including agricultural and open spaces as well as residential uses. Read more here: Land for the Many
Academic Research
The following article investigates density bonusing negotiations in Toronto. Density bonusing is one way to realize pubic benefit from private gain. The bonus is negotiated during the development approval process, through payments or other forms of contribution, in exchange for adding density.
The article examines the use of density bonusing over the 40 years that it has been in use and raises important issues about its ability to confer public benefits where they are most needed. Read more at Environment and Planning A: Economy and Space: Balancing Equity-Based Goals With Market-Driven Forces In Land Development: The Case Of Density Bonusing In Toronto
Footnotes
- Try: Ontario’s Government: Fix Supply To End The Housing Crisis. Have They Backed The Winning Horse?
- For an earlier post on this issue try: Not A Property Tax, But A Land Value Tax. Vancouver Explores A Way Of Taxing Pure Land Speculation.
- Next City provides three free reads per month. For more free reads, you will need sign up with an email address.
