Urban Land Markets

1. Urban Land Markets Presenter: Carlos Morales-Schechinger Best Practices for Land Tenure and Natural Resource Governance in Africa Monrovia, Liberia October 2012

2. Content • Land rent and the control of the use of land … what use, who controls … how much rent (or price) • Rent capitalized into price … rent capitalized into price … effect of a land tax on price… & rent • Land policies … cost vs. benefits … land prices vs. quality • Land instruments … zoning, taxes, rights, expropriation, readjustment

3. What is land rent? … payment to have access to the use of land … to anyone who controls such access to land • In money … or in kind • Periodic payment … or in advance • Statutory control … or customary control rent and the control of land 3

4. government • national • municipality • public agency • a group • tribe • family • cooperative • an individual • physical • legal Who controls land? rent and the control of land 4

5. government • mining • extracting water • a group • cultivate • graze • an individual • build • develop • The bundle of rights … or the bundle of controls rent and the control of land 5

6. government • mine • a group • cultivate • an individual • develop • taxes • lease (ground rent) • crops • presents • money • work • The bundle of rights … or the bundle of controls … to rent / sell … separately rent and the control of land 6

7. patrimonial • exchange values • did not invest • sells for a profit / benefit • can wait forever • buyers seek them • has poor information • asking price: highest of the region / city • misled by inflation • investor • exchange values • invested • sells for a profit • waits for land use change • seeks buyer • has good information • asking price: most able and willing user • not misled by inflation • occupier • use values • Invests to improve use values • sells to replace use values • cannot wait for long • seeks buyer • poor information • asking price: enough to replace use value • misled by inflation • Types of land owners … according to economic behaviour rent and the control of land 7

8. as patrimony as investment 1industrialist with an old factory 2poor family with a titled plot 3developer with agricultural land 4farmer with land in urban fringe 5chief with vacant in the inner city 6government housing agency with land as occupier • Types of land owners … according to economic behaviour rent and the control of land 8

9. public land Hong Kong Commu- nity land trust USA private land South- africa developer titling agency lessee private land Kenya pirate subdivider public land Vietnam ejido Mexico • government • market rent • administrative rent • + a bribe • a group • market price • agricultural price • + market price • - cost of regularization • an individual • market price • low density price • high density price How much rent? rent and the control of land 9

10. Land market misconceptions • Rent / price is paid to the land owner … vs. paid to the land controller • Full rents only paid if there is an open market … vs. always shared between various controllers • End users may pay lower than market price … vs. user end up paying full market price • Land values are produced by supply … they derive from the thrust of demand rent and the control of land 10

11. value price of wheat distance • Residual nature of the land rent … or how “land values” are created (?) rent and the control of land 11

12. value capital & labour transport land price of wheat distance • Residual nature of the land rent … or how “land values” are created rent and the control of land 12

13. price of a house maximum amount a household can pay value distance rent and the control of land 13

14. price of a house maximum amount a household can pay value capital & labour transport land distance rent and the control of land 14

15. value distance rent and the control of land 15

16. value • Where will agriculture start? A ? B ? distance rent and the control of land 16

17. value • What if demand for the city is expected to increase? A distance rent and the control of land 17

18. value • What if demand for the city is expected to increase? A C distance rent and the control of land 18

19. annual payment : $ 1,000 time rent $ 1,000 land price = = $ 20,000 5 % interest rate annual land tax rate = 2 %, $ 400 rent - tax $ 600 lower price of land = = $ 12,000 interest rate 5% rent capitalized into price

20. annual payment : $ 1,000 time rent $ 1,000 land price = = $ 20,000 5 % interest rate annual land tax rate = 0.2 %, $ 40 rent - tax $ 960 negligeable impact on price of land = = $ 19,200 interest rate rent capitalized into price

21. annual payment : $ 1,000 time rent $ 1,000 land price = = $ 20,000 5 % interest rate annual land tax rate = 4 %, $ 800 rent - tax $ 200 very lower price of land = = $ 4,000 interest rate 5% carlos morales-schechingerc.morales@ihs.nl rent capitalized into price

22. household house city agriculture household neighbourhood housing: . dignified . served . located . secure . on time . self- built . private developer . government agency . municipality : . property tax . betterment charge . building permit . value capture tax + income • - basic • = housing : . savings . loan . rent . peasant / original owner . agric. value land policies 22

23. speculation household house city agriculture household neighbourhood informal settlements the speculator: . manipulates information : - hiding, future infrastructure . buys agricultural land : - retains unused . captures externalities : - public infrastructure - authorized land uses . lobbies for: . tax abatement -“incentive” . regularization - pirate development . de-regulation - no plan, no standards . subsidies - loan rate, up front, services land policies 23

24. if household’s ability remains the same if household’s ability improves if a land use with higher ability appears - a given city “production cost” tax & services if cost reduced if costs increase + house subsidy + new zoning . high standards . low standards + new accesibility + wage increase . eviction risk . cheaper tech. . higher tax - same costs . tax rebates - same costs . inclus. p/s/e/a . free titling = the residue becomes land price = smaller residue = higher residue = the residue increases = higher residue improvements land land policies 24

25. economic content that could go to pay for land economic content that goes to pay for land lower price of land more house, neighbourhood and city higher price of land less house neighbourhood and city how much for each ? with which instruments? land policies 25

26. land instruments . Zoning … inclusionaryzoning … exclusionaryzoning … social interestareas … densityareas … developmentrequirements 26

27. . Landtaxes … updatingvalues, present vs future use … rate at highpercentage of landrent … landtaxes vs. land leasing … flat rate vs increasingrate … vacantlandsurcharge … rateincreasing in time … value capture tax vs bettermentcharge land instruments 27

28. . Developmentrights … transferedfromgovernment … transferedbetweenlandowners … buildinglicencefees … pricingaccordingtolandvalueincrement … parallel: land leasing land instruments 28

29. . Expropriation (eminentdomain) … definition of publicinterest … original, presentorfuturevalue of land … accordingtotaxationcriteria … tosubstituteowners’ responsabilities … vs. topunish non compliance of obligations land instruments 29

30. . Landreadjustment … equitabledistribution … of costs and benefits … multipleland use polygon … compulsoryassociation rules ... continuous vs discontinuouspolygones land instruments 30

31. higher tax on capital and labour (productive activities) transfers subsidies Adapted from Smolka, 2004 WEAK MUNICIPALITIES scarce public funds low investment on urban services tax exemption, titling and subsidized services serviced land withdrawn from market lower tax base, higher need for services scarce serviced land serviced land over-priced land retained for future market families impoverished higher profit expectations exclusion form serviced land market price rise expectations subsidized services deregulation and tax reduction “incentives” unserviced land over-priced refuge in informal unserviced land market low development costs INFORMALITY SPECULATION land instruments 31

32. Adapted from Smolka, 2004 lower tax on capital and labour (productive activities) less transfers less subsidies STRONG MUNICIPALITIES high investment in urban services abundant public fundas no tax exemption, nor subsidies, no need for titling programs more serviced land supplied higher tax base and lower need for services abundant serviced land land released for current market families with surplus moderate expectations inclusion in serviced land market serviced land not over-priced lower prices expectations serviced land not overpriced no subsidies higher regulation and taxes on vacant land dispise of informal unserviced land market development costs internalized ACCESS TO FORMAL LAND SUPPLY OF SERVICED LAND land instruments 32

33. land and the urban poor THANK YOU QUESTIONS ? Rosinha Rio de Janeiro Kibera Nairobi Khayelitsha Cape Town Neza, Mexico City Kali Besar Jakarta Tunel La Planicie Caracas 33