The book ‘Rethinking the Economics of Land and Housing’ by Josh Ryan-Collins, Toby Lloyd, and Laurie Macfarlane is a great introduction to housing issues and better housing policy. It focuses on the UK but has lessons for housing everywhere. Having watched the Canadian housing bubble for the last decade, it is great to see these viewpoints re-emerging and gaining traction.
Canadian housing has had quite the run when compared to historical trends. I could post a dozen charts but will show the following two. Here is the price of housing in Canada over a long period of time. There have been many boom and bust cycles, and prices have recently increased tremendously.
Source: AEI via Ritholtz
The debt structure that supports prices is vulnerable given its high growth rate and high level:
I believe that the high housing prices are an asset bubble which is the result of a massive self-reinforcing credit bubble, founded on a mistaken belief that land is a normal factor of production and facilitated by private banking sector backstopped by central banking. Canada has the potential to go through a deleveraging phase shortly, which will be a large adjustment. No one can time when this will happen, and credit growth is still positive so it is unlikely it has started but should be monitored closely. The time to discuss long term solutions is now (or yesterday). This trend is especially important to get right because of the potential for higher unemployment in the future via adoption of automation and artificial intelligence, and the lack of competitiveness in the Canadian economy (see How we can win).
An example of this house price /credit cycle from the book and video “Rethinking the Economics of Land and Housing”:
Source: Rethinking the Economics of Land and Housing via Google Books
Source: Rethinking the Economics of Land and Housing (video below)
Also see: When Credit Bites Back: Leverage, Business Cycles, and Crises
There are many foundational structures as well as amplifying mechanisms that have lead to the housing bubble. The problem is complex so its impossible to disentangle the contribution of each driver, but I think the path forward to solutions is more clear once the role of land in the economy is better understood.
-Failure to distinguish between Investment credit (for the creation of goods and services or productivity gains) and unproductive Financial Credit (causes Asset Inflation, Bubbles and Banking Crises, floods the economy with financial claims with little cash flow return on investment, only Greater Fool return on investment through asset price appreciation/capital gains). Investment credit focuses mainly on bidding up the price of assets already in existence instead of creating new tangible investment.
Read any economics or finance textbook, and it will describe how banks take money from savers and lend it to business borrowers, allocating money among alternative capital investment projects. But as a description of what banks do in modern economies, this is dangerously fictitious for two reasons. First, because banks do not intermediate already existing money, but create credit, money, and purchasing power which did not previously exist. And second, because the vast majority of bank lending in advanced economies does not support new business investment but instead funds either increased consumption or the purchase of already existing assets, in particular real estate and the urban land on which it sits….- Debt and the devil
Lending to finance non-real estate business investment requires difficult and expensive assessment of project prospects and future cash flows: and if the project fails, the assets finance often have little resale value. But real estate, whether commercial or residential, usually has value for many alternative users. Taking security against real estate therefore seems to simply risk assessment. Banks seeking rapid market share growth nearly always focus on real estate; safely expanding other types of lending requires the gradual and difficult build-up of customer relations and knowledge. And at least in residential real estate, though not commercial, actual loan losses are often low even in the face of major economic recession. In the latest crisis, it is true that US losses from residential mortgage lending have reach 7% of the total loan volumes. – Debt and the devil
In simple terms, what Turner is saying is that rather than funding the new ideas and projects that create jobs and raise wages, finance has shifted its attention to securitizing existing assets ( likes homes, stocks, bonds and such), turning them into tradable products that can be spliced and diced and sold as many times as possible – that is until things blow up, as they did in 2008. Turner estimates that a mere 15 percent of all financial flows now go into projects in the real economy. – Makers and Takers by Rana Foroohar
In most advanced countries, the share of mortgage lending relative to other lending has increased dramatically over the past century. With very few exceptions, the banks’ primary business consisted of non-mortgage lending to companies both in 1928 and 1970. In 2007, banks in most countries had turned primarily in to real estate lenders (Oscar Jorda 2016, p 16) – Rethinking the Economics of Land and Housing
– A misunderstanding of Economic Rents and the role of land monopolies: Most of the price increase is from gains in land and not dwellings. Land is a factor of production with a fixed supply (scarce) and no cost of production. It is like a monopoly. It should be dealt with in different ways than traditional goods and economic models that take this into consideration should be developed.
All of the classical economists, including Marx, Smith, David Ricardo and John Stuart Mill, viewed land as a vital factor of production. But it was recognised that land had special qualities that distinguished it from capital and labour, in particular that it was in fixed supply and had no cost of production. All else being equal, this means any increase in the demand for land will only be reflected in an increase in its price and not its quantity. Whoever owns the land upon which this increased demand is placed is in a unique position economically: they possess a good that is not subject to the normal laws of market competition. The ownership of such a resource allows the owner to benefit from additional unearned income, what the classical economists called ‘economic rent’. – Rethinking the Economics of Land and Housing
‘Rent’ in common parlance refers to payment made by one party to another for the temporary use of something – for example, a flat, a car or a machine tools. In economics, however, rent (or economic rent) has a resulted but different meaning. It generally refers to any benefit that is derived from the exclusive possession of a scarce or exclusive factor of production, in excess of the cost of bringing that factor into production. Those that earn such rents are often referred to as ‘rentiers’ (from the French) or the ‘rentier class’. Economic rent should not be confused with normal profit or producer surplus, both of which involve productive human action. – Rethinking the Economics of Land and Housing
“Classical economists distinguished between earned income (wages and profits) and unearned income (land rent, monopoly rent and interest). The effect was to distinguish between wealth earned through capital and enterprise that reflects labor effort, and unearned wealth stemming from appropriation of land and other natural resources, monopoly privileges (including banking and money management) and inflationary asset-price “capital” gains. – Michael Hudson”
Today’s economics textbooks describe ‘income’ narrowly as a reward for one’s contribution to production. Wealth is understood as ‘savings’ due to one’s productive investment effort, not as unearned windfalls from being the owner land or other naturally scare sources of value. Mainstream economic theory pays little attention to the role of institutions, including systems of land-ownership, property rights and land taxation that are historically determined by power and class relations. In fact it is these inherently political, social and cultural developments that determine the way in which economic rent is distributed.- Rethinking the Economics of Land and Housing
– Rentier profits interaction with the banking system causing a self-reinforcing credit cycle. Ask yourself how should the economic rent from land monopoly be distributed? Should it be predominantly captured through higher taxes and reinvested in local infrastructure for the benefit of society, or should it be capitalized as interest payments to bank lending in an ever increasing cycle of prices?
Today it is the interaction between land, property and the financial system that shapes the macroeconomy. Land has become ‘financialised’, the object of speculative lending and investment, resulting in land and house prices separating themselves from growth and incomes in the wider economy. This fact is increasingly recognized by a number of eminent economists as a central problem for modern economies – fro example John Muellbauer (2012), Adair Turner (2015a) and Joseph Stiglitz (2015a) – but is yet to be addressed by policy makers. – Rethinking the Economics of Land and Housing
As land prices rise beyond average incomes, mortagge debt-to-income ratios have increased. In order to access landownership, many households have had to increase their debt to the banking system relative to their income with the result that the financial sector can be seen to have capitalised an increasing proportion of the economic rent from land in the form of interest payments on mortgage debts (Hudson 2010). As homeownership levels have fallen in the UK in the last decade, rents have become more concentrated in the hands of property owners and indirectly in the banking sector. – Rethinking the Economics of Land and Housing
Source: Saving, Asset-Price Inflation, and Debt-Induced Deflation – Michael Hudson
The exponential growth of savings and debt takes the form mainly of loans to finance the purchase of real estate, stocks and bonds. These loans extract interest and amortization charges that divert revenue away from being spent on goods and services. The payment of debt service by the economy’s non-financial sectors interrupts the circular flow that Say’s Law postulates to exist between producers and consumers.
Financial institutions re-lend their interest and other financial inflows as new loans to finance asset purchases. The result is that net savings do not increase for the economy as a whole. Meanwhile, lending out savings helps bid up asset prices, but does not necessarily promote new tangible investment and employment or increase real wages and commodity prices. In fact, new tangible investment and employment decline as investors find it easier to obtain price gains in stocks, bonds and real estate than to make profits by investing in factories and other tangible means of production. The effect is to divert savings and credit away from financing new direct investment, and hence from employing labor to produce more output. – Michael Hudson
By attaching a cost to owning land, LVT (Land Value Tax) diminishes the incentive to buy land for speculative purposes – ie to realize capital gains – rather than productive purposes, as the tax imposes a holding costs on land, and a good part of any increase in land values would be shared with the public purse. Instead a land tax encourages efficient land use, creating less incentive for developers to hoard undeveloped land. – Rethinking the Economics of Land and Housing
It thus is helpful to distinguish between the propensity to save (1) by labor and industrial firms out of income earned by producing goods and services, and (2) by the FIRE sector out of debt service and rental charges. Drawing this distinction requires that the economy itself be viewed as a combination of two separate parts, by separating the FIRE sector from the rest of the economy. I refer to these two sectors as (1) the production and consumption economy comprising fixed capital and labor, and (2) the economically larger property and financial sector receiving rentier income (defined to include financial “service” fees). –Michael Hudson
– The transition of Land/Housing from a consumption good to investment good. When prices of a consumption good rise in an economic setting consumers tend to buy less of it, as prices fall, they tend to buy more. When prices of an investment good rise in a financial setting, this is inverted, as people tend to buy more as it appreciates and less when it depreciates. Most owners view it as something to be sold at a higher price to others.
Source: Robert Prechter (via Didier Sornette)
-The proliferation of home equity line of credit: Lending against an asset that gets its value at the point of transaction, and recycling these loans into new land.
Asset market purchases—Housing and Shares—are the main methods by which Households and Firms have attempted to achieve positive equity, and hence the appearance of savings, in the last 30 years. This has superficially worked because the price in asset markets is set by the marginal transaction—the buying and selling actions of people actually trading on the market. But this price is then multiplied by the entire outstanding stock of assets to derive an implied aggregate net worth for the asset class. This implied net worth is then recorded as an Asset of the Private Sector. But it is a notional asset only, since if all house or share owners tried to actually turn their implicit gains (in terms of the increase of the implied worth of their properties and shares since the time of purchase) into actual gains, the volume of selling would overwhelm buying and prices would collapse. Then nominal value of these assets would collapse (as happened in the USA in particular during the Great Recession), putting their owners (including banks) into negative equity – Steve Keen
– Cultural/Fear-of-missing out/Keeping up with the joneses: Housing has become a positional good signaling a greater status in society.
“An investment theme is a rationale for market behavior. It tells the market’s story by explaining why prices have changed so dramatically and by offering, at least implicitly, a prediction for their direction in the immediate future. The explanatory nature of an investment theme is important here. It is this apparently logical explanation of the past that sustains the associated information cascade……The price change itself was taken as confirming evidence for the validity of the theme (sentiment cycle). They no longer attempt assessments of the relationship of price to fair value (justifications, new indicators, rationalizations)….. The pressures to conform to group behavior and to accept the social and promised financial benefits attached to participation I a successful group may overwhelm individuals’ capacity for rational calculation….. The social and financial pressure an investment crowd can exert on disbelievers cannot be overestimated. While much of a crowd’s growth occurs as the result of an information cascade, the continuous strengthening of a crowd’s mental unity through constant affirmation, repetition, and dramatic price changes in the crowd’s asset makes this unity a powerful tool of persuasion. It magnifies the crowd’s impact and importance and puts pressure on even the skeptics to join.
– The Art of Contrarian Trading (Carl Futia)”
– Concentrated Oligopolistic Banking System with institutions that are Too big to fail backstopped by the Central Bank
– Central Banking: Too many issues to list, but should play a role only as counter cyclical feedback mechanism
– Secular decline in interest rates
– Declining Lending Standards & Exotic lending products. Private lending & Shadow Banking institutions
– Government Backstops/Insurance
– Adoption of Originate and Distribute lending: “This involves originating (issuing) loans but then packing these up together into securities (debt instruments) and generating profits from selling them on to the third-party investment, such as pension funds, insurance companies or other forms of asset management funds.”
– Poor data capture and tracking, Lack of Transparency of Ownership
– Control of data by special interest groups, Changing of Statistics through time
– Fraud, Money Laundering, Illicit Capital Flows, Corruption
– Foreign Investment in a Global ‘Investment Good’ that should be a Local Consumption Good
– Land Use Regulation
– Housing stock built for an investment good vs structures that facilitate community living
– Housing related FIRE (Finance Insurance Real Estate) economy represents a large enough of share of the economy that the size of the special interest groups will make implementing long term solutions politically difficult
– And more….
*This list was created thanks to a huge group on financial/housing twitter and blogosphere. If anyone is interested in further expanding this list and adding more resource links, please contact me.
The focus of this post is the book and lecture “Rethinking The Economics of Land and Housing” (Josh Ryan-Collins, Toby Lloyd, and Laurie Macfarlane) , which focuses on the economic rent and bank credit aspects of housing.
More Quotes from Rethinking the Economics of Land and Housing:
• 2: This book is focuses don the macroeconomics and political economy of land – in other words, how it impacts on aggregate or national economic phenomena, such as the distribution of wealth and income, changes in asset prices, flows of credit and stocks of debt, and, for the most part, the national rather than international or local/regional policy and political sphere. A particular goal is to help develop a more coherent analysis of the role of ‘economic rent’ in modern economies: that is, the excess returns derived from the ownership of a natural (usually scarce) resource. Land, we believe, is the most important source of such rents in advanced economies and also the most neglected. The book is motivated by the failure of mainstream macroeconomics to develop theories adequate to explaining these dynamics.
• But the quantity of land cannot be increased in the same way the quantitiy of iPhones can. If demand for land increases, the price goes up without triggering a supply response. This problem may be exacerbated by planning regulations that restrict the supply of land over and above its natural scarcity (Cheshire and Sheppard, 2004) but, as we argue in Chapter 7, such regulations merely crystallize the problems of scarcity and rent, and make them more amenable to democratically controlled policy mitigation.
• As David Ricardo (and later Henry George) identified, the ability to extract economic rent is so powerful it can effectly monopolise much of the growth created in an economy, the vast bulk of which will not have been created by the landowners themselves. In its simplest conception, as the economy grows, landowners can increase the rent they charge non-owners to absorb all the additional value that their tenants (such as workers, shopkeepers, and industrialists) generate.
• Rent-seeking seems intuitively unfair to many, but it is also inefficient. If the worker, the shopkeeper or the industrialist cannot benefit from their own efforts, but must watch it being extracted in the form of rent, why would they exert themselves or innovate?….The ability to extract rent for little effort or risk also distrorts investment decisions, as it encourages those with capital to over-allocate it to land and property purchases, rather than other productive uses (see Chapter 5).
• The allure of rent extraction encourages those who can to accumulate land, and the monopolistic nature of private ownership of land enables them to preserve and expand their holdings. Historical evidence suggests that markets in private property tend towards concentration, and to absorb a disproportionate share of growth (Geroge 1979, Ricardo, 1817). The result is growing wealth inequality, actue poverty for some, and inefficient capital allocation which dampens economic growth (which we explore in Chapter 6). As Joseph Stiglitz has put it, rent-seeking involves directing effort ‘toward getting a larger share of the pie rather than increase the size of the pie’ (Stiglitz and Bilmes, 2012).
• 27: relationship between growth of home ownership and rising unemployment. Oswald 2009: five explanations. 1) less mobile than renters and more vulnerable to economic downturns 2) block umemployed people’s ability to enter an area 3) immobile economy, pick jobs not suited for, lower productivity 4) more restrictive planning legislation 5) homeowners commute longer distances
• 39: All of the classical economists, including Marx, Smith, David Ricardo and John Stuart Mill, viewed land as a vital factor of production. But it was recognized that land had special qualities that distinguished it from capital and labour, in particular that it was in fixed supply and had no cost of production. All else being equal, this means any increase in the demand for land will only be reflected in an increase in its price and not its quantity. Whoever owns the land upon which this increased demand is placed is in a unique position economically: they possess a good that is not subject to the normal laws of market competition. The ownership of such a resource allows the owner to benefit from additional unearned income, what the classical economists called ‘economic rent’.
• 46: Henry Geroge’s Progress and Poverty, first published in 1879, was the most significant publication on the topic of land and tax. George’s central question in the book is how it is possible for society to make such huge leaps of progress through technological and social advances – including education and social services – yet still be dogged by poverty, inequality and unemployment and damaging economic cycles. His explanation, following Ricardo, is that such advances, while benefiting mankind, also increase the value of land and thus the amount of economic rent that can be demand by the owners of land from those who need to use it.
• The nautral tendency of the price of land and the rent charged for its use to increase faster than wealth can be produce to pay for it, George argued, has the result of lowering the proportion of growth remaining for wages and investment. Thus the landowner monopolises the proceeds of growth. Eventually, a tipping point is reached, leading to the collapse of enterprises at the margin that can no longer afford to pay their staff and this may lead to a more widespread economic downtown with rising unemployment, banking crises and forclosures. This natural tendency of economic rent to crowd out productive investment is, according to some, the true cause of the business cycles that plague advanced economies (Anderson 2009; George 1879, 1979 pp 102-110).
• The solution, for George, was a comprehensive ‘single tax’, a land value tax (LVT), levied annually on the value of land held as private property. It would be high enough to end other taxes, especially upon labour and production, and would fiannce beneficial public investment in transport and provide improved social services, including a basic income for every citizen as a form of comprehensive welfare provision ( see for example Van Parijis, 1992; Reed 2016). George argued that LVT would give landowners an incentive to use desirably located land more efficiently, increase the demand for labour and creating wealth. This would lead to higher wages and ensure the end of poverty.
• Monopoly board game: But the origins of the game lie with the American anti-monopolist Elizabeth J. Magie Phillips, who created ‘The Landlords Game’ in 1904 as a means of explaining Henry George’s single tax theory to the public. The game operated along similar lines to its successor, Monopoly, but had an alternative set of rules that allowed players to cooperate with each other and pay rent intoa common pot rather than to individual landowners, therefore securing prosperity for all players. The game spread around Amercica and adopted various forms and names. Eventually Charles Darrow (The ‘official’ inventor of the game) patented his version in 1932 and sold the rights to game maker Parker Brothers, making millions.
• 54: As technological developments drive down the costs of other goods, so competition over the most prize land rises and eats up an increasing share of people’s income.
• 57: Political reasons for the disappearance of land from economic theory
• Representing and supported by vested and landed interests opposed to land taxation (Gaffney, Hudson 2010)
• The economic rent from land enjoyed much less attention. One potential reason is that George himself and the single tax movement failed to form a broad alliance with the growing socialist movements of the late nineteenth and earlier twentieth centuries because of their fixation on land rent – and taxation as the solution – above and beyond other forms of economic rent. According to Hudson (2008 p4) the narrow focus on land tax ‘ isolated George from reformers who came to view the land tax as being so sharp a challenge to the propertied interests that they turned to more readily achievable public regulation and more general tax reforms..George…opposed socialist ownership of capital and even refrained from advocating industrial and financial reforms. George’s intolerance in rejecting these reforms helped push his single tax advocacy to the outer periphery of the political spectrum’
• 63: Mainstream policy debate has become focused precisely on this issue: calls are repeatedly made to build more homes or allow more land to be made available for home building. As with other policy challenges, such as unemployment, the focus is on the supply side. Housing demand is assumed to be subject to the same rules that drive desire for any other commodity: its marginal productivity and utility. The distribution of land and property wealth across the population, its taxation and the role of the banking system in driving up prices though increases in mortgage debt (Chapter 5) are neglected
• Human beings do not and cannot ‘make’ land in the way they can make commodities if more is demanded. Rather, we occupy scare land in the process of production and consumption. If this resource is not appropriately managed it can easily become misallocated and wasted through speculation. As land has become relatively scarcer in countries like the UK, so have house prices risen, and owning a property has become the goal of households, not for its use value as a home but as a financial asset.
• The neglect of land in economic theory and policy has also had implications for the measurement of land values. In many advanced economies land values are not properly measure and tracked over time. For example, access to the information held by the Land Registry for England and Wales is not free, making the land market highly opaque. The problem is worsened by the near total absence of publicly available data on the value of land or property. Despite a plethora of generalized indices of house prices, the only official index of land prices was discontinued in 2011, and the datasets on the value of commercial property held by the Valuation Office Agency for the levying of business rates are not publicly available. This paucity of market information creates significant inefficiencies and barriers to entry ( see Chapter 4) and restricts the ability of public bodies and citizens to scrutinize the activities of landowners and developers
• 64: The classical economists of the nineteenth century were conscious of the key role of land as a factor of production and the means via which economic rent could be extracted from the economy. But the theories and policy solutions of Ricardo, Mill, Smith, and George were gradually erased from economic theory and public policy during the early twentieth century. A confluence of factors – the shift to urban production and industry and away from the agriculture, the failure of Henry George and his followers to form an alliance with European socialists focused on other forms of economic rent, and the rise of neoclassical economic theory – led to the eventual disappearance of land and economic rent from modern theories of production and distribution.
• But land is not capital, nor is it just another commodity. It is fixed in its supply and fixed in time and space. Yet it is central to production. For these reasons, ownership of land grants the opportunity for the extraction of economic rent as businesses and households seek out the most attractive location, stretching their spending power as for as it will go. The scarcity of desirably locational land property means its income elasticity is higher than parity – as their incomes increase people will be prepared to spend relatively more on it than other goods and services. Conversely it is also price inelastic compared to most commodities: rising prices relative to incomes will lead to consumers taking on more debt and more speculative purchases, rather than seeking alternatives (chapter 5).
• The US and UK economies…turned their populations in to highly leveraged speculators in a fixed asset that dominates most portfolios and impairs personal mobility. Martin Wolf (2008)
• One reason policy makers have failed to recognize the issue is that mainstream economic theory lacks a coherent analysis of land and its role in the production process and the problems that can arise if economic rent is not addressed, as outlined in the previous two chapters. But just as importantly, mainstream economic theory fails to properly conceptualize the role of banking system in the economy and the flows of credit and stocks of debts it creates.
• In neoclassical economics, credit and money are considered a ‘veil’ over the real economy, which is made up of the exchange of ‘real’ goods and services in production and consumption (Schumpeter 1954 p277). Banks role is to oil this process by recycling pre-existing savings to borrowers (non-financial businesses) to invest in productive businesses creating goods and services. Fluctuations in the supply of money and credit may cause short term shocks in the economy but in the long run they are assumed to be neutral, with economic growth primarily determined by changes in technology and labour productivity.
• In fact, when a commercial bank makes a loan it does not ‘recycle’ money from elsewhere in the economy, rather it creates new money and purchasing power (McLeay et all 2014). In addition, banks do not only create money for businesses to invest in production. They also create money for existing property and land purchase.
• If banks create credit and money against existing land, as with the majority of home mortagges, this can inflate house and land prices. Rising prices mean households an firms must borrow more to become home or landowners. Therefore the supply of bank credit can be seen to create its own increased demand for even more credit, assuming a fixed supply of land. The demand for land can then stretch well beyond people’s incomes or firms’ profits – ad the growth rate of the economy – in particular if people expect house prices to continue to rise fatter than incomes. As debt-to-income ratios build up, this will have non-neutral long-term ‘real’ economy effects; people may start to reduce their consumption as more and more of their income is taken up in mortagge repayments.
• As we explore in section 5.6, there is evidence that modern economies are driven less by the traditional and quite short-term ‘business cycle’ that most economists have focused their attention on (typically a couple of years) and more by a longer-term ‘credit’ or ‘financial’ cycle (over 16-18 years) that is mainly driven by land and property values (Aikman et al 2014; Anderson 2009; Borio, 2014; Minsky 1992)
• The reasons for the emergence of this housing-credit cycle are related to deregulation and liberalization of the mortgage credit market, which we discuss below in sections 5.4 and 5.5 in more depth.
• 135 Originate and Distribute: \In the standard textbook model of banking, banks, hold laons to maturity and generate profits on the difference between the interest charged on these loans and the interest the bank pays to depositors: the ‘interest-rate spread’. Since the 2000s, however, many banks, in particular in the UK and even more so in the United States, began to adopt a new business model. This involves originating (issuing) loans but then packing these up together into securities (debt instruments) and generating profits from selling them on to the third-party investment, such as pension funds, insurance companies or other forms of asset management funds.
• Wealth comes in different forms. Pension wealth cannot be drawn down to support spending in the economy until people retire. Investments in shares provide regular dividends depending on the profitability of companies. But land and housing wealth is different. Because of the deregulation of mortgage credit that we discussed in section 5.4, housing wealth allows households to borrow significant amounts of new money for consumption today. Since consumption makes up around two-thirds of national income in most advanced economies, changes to housing equity have important macroeconomic impacts.
• As explained in Chapter 3, because land is fixed in supply and does not depreciate, its relative price tends to increase as output and demand grows. In contrast, capital depreciates over time, meaning that maintaining or increasing the capital stock requires saving for investment in future production.
• Indeed, Piketty’s dataset shows that much of the increase in the wealth-to-income ratio observed since 1970 has little to do with savings; rather it is the result of rising asset prices (capital gains), mainly relating to increases in the value of residential land (Rognlie, 2014). Once the effects of capital gains are removed, the underlying wealth-to-income ratio has actually fallen significantly in the UK since 1970 (see Figure 6.4). This indicates a decline in the UK’s productive capital stock over the past four decades relative to national income…..The implications of this analysis are vital for understanding the dynamics of growing inequality in recent decades. Firstly, it means that the increase in the wealth-to-income ratio observed in Piketty’s data, which has underpinned the rise of inequality, has been driven not by productive activity, but rather by increasing residential land values which have manifested themselves through rising house prices. Put another way, this wealth has originated from windfalls resulting from exlusive control of a scare natural resource in the face of ising demand from economic development, population growth and financial deregulation. As discussed in Chapter 3, the classical economists would have viewed this as an accumulation of unearned economic rent; a transfer of wealth from the rest of society towards land and property owners (George, 1979).
• 199: tax reform. In chapter 3, we noted how land value taxation was the approach to the problem of economic rent preferred by many of the classical liberal political economists – Ricardo, Smith, Mill and later Henry George. These thinkers were keen to maintain the institution of private property, which they asaw as important for economic development. A pure land value tax on the market value of unimproved land would appear to be the most economically efficient way of raising taxes, not distorting bur rather supporting investment and productive activity. LVT also has a strong moral basis; capturing the unearned windfalls from collective development for the state and wider community.
• 207: Economic history thus provides evidence that by limiting bank credit for transations that do not contribute to GDP, asset bubbles and banking crises could be avoided in future. To be sure, such a measure would not stop speculation in land and property; instead, it would not allow speculators to use the public privilege of money creation for their speculative transactions, which might help avoid property market booms and busts
• 211: alternatives to debt-based financing for home purchases. Islamic finance, shared responsibility mortages (mian and sufi),
• 212: ban maturaity transformation. Denmark
• 212: A more permanent solution for de-linking land from fiannce would simply be to ban maturity transformation involving property assets or all assets, via shifting to a narrow banking (Cochrane, 2014; Kay, 2009) or ‘soverign money’ system where only the central bank would have the power to create new money (Benes and Kymhof, 2012; Dyson and Jackson, 2013). Under such a system, the lending and epository functions of banks would be separated and they would be limited to playing a true intermediary role of matching savers and borrowers in the way that peer-to-peer lenders, such as Zopa, do today, without levering their balance sheets….Mortgage finance under such a regime could be provided by institutional investors with long-term liabilities, such as pension funds and insurance companies, to solve the problem of maturity mismatch….
• Subsidies and taxation policies that favour home-ownership over other forms of tenure need to be scaled back
• 221: The government should therefore consider developing a more comprehensive definition of government ebt to include income-generating physical assets. For example, a better measure of government debt could be gross government debt minus liquid and income-generating assets, relative to national income. Under this measure increasing government gross debt would then not be a concern if it was matched by an increase in assets such as publicily owned land and housing (Muellvauer, 2014). This would no doubt incentivise governments to invest more heavily in land-based infrastructure such as affordable housing and transport.