Although most know of the board game Monopoly, many are unaware of its origins as a Georgism propaganda piece. The problem the game identifies is that real estate capital begets yet more capital, eventually bankrupting everyone with less real estate. Georgism offers a simple solution to the dilemma: a land value tax. Even in George’s time, the tax was not a novelty but rather originally recommended by classical Liberal economist John Locke.

There is relevance to the current housing situation in Canada: detached housing is growing at rates above and beyond most other investments. The end result has priced new families out of the detached market and driven up rent for those in multi-unit complexes. How did we get here? It appears the process was akin to the board game itself.

In the game, there are two main factors that decide the long term fates of the players. The first is how much land they can accrue early on and the second is how many housed monopolies they can gather for each zone. The first begets bartering power for the second later in the game. Land is a scarce resource on the board, with no supply elasticity. The initial acquisition of land is parallel to the original landowners of urban Canadian areas from the 20th century on. The game’s zoning monopolies are analogous to municipal governments who will tell you how many houses you’re allowed to build on a lot and what type of house you may build.

Land use restrictions

The problem with the ownership of land use by municipal governments is that it appears to act in its own self-interest, depleting a common good with an inelastic supply. This is a variant of the classical problem known as the tragedy of the commons. Municipal governments, consisting of landowners heavily lobbied by real estate finance, control the units of land. By preventing new housing from being constructed on land while demand for housing increases, landowners effectively pay themselves with land value increases by hoarding. Why wouldn’t they? The less housing produced as demand increases, the more valuable their housing is and the greater their net worth. The price of housing assumes the structure of a feedback loop, where prices go up from demand of a fixed supply resource, which further drives more demand, and so on and so forth. Newcomers are priced out of the market through the regulatory cartels and must rent housing, if they can even find it.

Of course, the party can’t go on forever. People just build upwards instead of side-to-side (“urban consolidation”). Then everyone lives in condominiums, except for a chosen few. Anyway, is this really happening? Is there evidence? My personal experience tells me there is. Some of my childhood was filled with my father’s 15 year battle against the NIMBY cartel of a suburban township. He had wanted to build about 20 new homes on 10 acres of vacant land and was fought vigorously for the right to do so. As time goes on, data also makes it out to be the case. In a Fraser Institute report about the severity of Golden Horseshoe’s land use regulations, authors Green, Herzog, and Filipowicz write “opposition to residential development is perceived as strongest in cities where dwelling values are highest, raising questions about the causes and consequences of local resistance to new housing.” A 2013 comparison of land use restrictions to housing affordability in the US by economist Jason Furman shows the trend clearly. Ironically, this article was removed from whitehouse.gov by the incoming Trump administration.

Jason Furman, 2015. “Deciphering the Fall and Rise in the NetCapital Share: Accumulation or Scarcity?”

In fact, as argued by economist Matthew Rognlie, growing wealth disparities in the 21st century are fueled primarily by housing price gains. In the figure from his paper below, we can observe that investment-produced income from housing sources is on the rise while non-housing income stagnates. Indeed, REITs (real estate investment trusts) have strongly outperformed the stock market for the past 15 years and the trend looks like it won’t let up any time soon.

Matthew Rognlie, 2015. “Barriers to Shared Growth: The Case of Land Use Regulation and Economic Rents”

This is a not-so-good development, given that housing is basic requirement for living. If the price of water were to go up 50-fold in 5 years, even those living on a property with a well would not be celebrating. Like water or electricity, shelter is a minimum requirement that every person needs in order to survive. Every increase in its cost causes a deflationary effect on the economy by depressing aggregate demand. Vulnerable populations are among those most likely to be severely affected: the number of homeless older adults and seniors using shelters in Canada has sharply increased from 2005 to 2014, even adjusting for the aging boomer population.

Land use zoning is a new concept in economics, having only existed in the current form from the 20th century on. The matter of land use regulation made its way to the 1920’s US Supreme Court in Village of Euclid v. Ambler Realty Co., in which a land owning company sued a village government over zoning that devalued land it had purchased and was planning to develop. The village won, setting a precedence that would be echoed in various other national courts around the world. It should be noted that in many cases, land use restrictions are both important and productive. They keep private interests from destroying the environment or depleting natural resources. Unfortunately, as we’ve observed, they may also have negative consequences.

The solution to a local government cartel pumping its own real estate prices requires intervention at the level of Federal or Provincial government. Mercatus Center economists Sanford Ikeda and Emily Washington explore different proposals in How Land-Use Regulation Undermines Affordable Housing. These include a government subsidized home equity insurance that protects home owners from falling property values resulting from rezoning and a “zoning budget” which restricts the amount of land that can be protected from development. Another is so-called Tax Increment Local Transfers (TILTs), in which landowners are incentivized to allow productive rezoning by reductions to their own tax liabilities. These reductions are paid for by the inclusion of new taxpayers in the municipality. These or other restrictions of municipal regulation are needed in Canada to help deter housing bubbles, keep the real estate market efficient, and ensure that the vital resource of shelter remains accessible to all.

Land value tax

The Liberal economist proposal of land value tax deserves review, since Canada does not employ them in the classical sense. Ontario uses property taxes to fund municipal governments. Commercial properties endure much higher rates of taxation than residential properties. These together produce a deleterious effect. Under a strict land value tax system, inhabitants renting a condominium should pay the least in taxes. But, because condominiums are considered commercial buildings, they’re taxed at much higher rates than those for detached houses. This makes detached housing or townhouse ownership that much more lucrative, increasing its demand. Municipalities could temper such demand by introducing a new land value tax and by taxing multi-unit buildings at non-commercial rates. Additionally, a land value tax would provide an incentive for all available land to be developed into housing should demand require it: it would disproportionately tax those with large, unused sections of land or those with expansive detached housing. Such a tax should both decrease urban sprawl and encourage efficient land use.

A caveat: land value taxes aren’t the be-all-and-end-all of increased market efficiency and diminished volatility. For example, Sydney employs a land value tax yet, according to the Demographia International Housing Affordability Survey¸ is ranked 2nd in least affordable cities throughout the globe. As with other urban areas devoid of a land value tax, it has assumed an enormous housing bubble over the past two decades. The report blames land use restrictions.

A really boring game of Monopoly

With these tools at hand, we can envision the world’s least entertaining game of Monopoly. One new rule would be that every time someone passed go, they would have to pay an expensive land value tax on all the properties they owned. The land value tax would pay back into the allocation at free parking, or be given equally to other players as they pass go. Then we would remove the rule that any player needed a full hand of single-color properties to build houses or a hotel, effectively doing away with land use restrictions. The net effect would be a never-ending game in which all players achieve similar amounts of real estate success. This makes for terrible entertainment, but at least it would be devoid of the dramatic battles for survival that are the hallmark of late night Monopoly games. Likewise, we can imagine that new legislation can end the battle for survival that modern housing has become.