Land Speculation Endangers the Economy

Frank Chodorov

[Reprinted from Human Events, Vol. XVII, No.50, 15 December, 1960. A PDF version of this article is also available]

There is a school of economists who hold that depressions (or "hard times," as they used to be called) result from speculation in land values. This, in brief, is the way their theory runs:

All economic goods, including services, come from the application of labor and capital to raw materials; there is no other way to produce the things men live by. Labor is abundant, capital can be accumulated, but land is a fixed quantity; there is no way for man to create mines, to manufacture farm lands, to fabricate a new world. Land is what it always was, and always will be.

All production starts with land, and as production increases the demand for land increases. This causes the value of the more desirable sites to rise. Anticipating a further increase in production, and therefore a greater need for land, owners are prone to keep their holdings out of use in expectation of receiving higher prices. This is speculation. Land becomes something to gamble with, not to use. Builders have to pay more and more for the privilege of erecting houses on city sites; farmers need more and more capital to acquire agricultural lands, and the rising price of mineral lands shows up in the prices of commodities the consumer uses.

Eventually, the cost of land becomes prohibitive; there is little left for labor and capital to compensate them for their effort in production. At that point, labor and capital lay down on the job and production declines. A depression is nothing but a stoppage of production. When production comes to a halt, the demand for land decreases and so does the price. The speculative value of land is squeezed out (that is, the last speculator loses his paper profits). When the price of land comes down to its normal level, production starts in again. That is, the theory holds, the only way out of the depression.

There is support for this theory in the known fact that depressions are felt in the extractive industries long before they hit the commercial and manufacturing centers. Let us take, as an instance, the depression of the 1930's. During World War I, the prices of farm products, due to the great demand, rose to phenomenal heights - so much so that the government saw fit to put a top price on certain commodities. To cash in on this demand, farmers acquired additional land at ridiculously high prices, which, of course, meant burdening themselves with big mortgages.

When the war was over, the demand for agricultural products declined and so did the prices. As a result, the farmers' income dropped to a point where they could not meet the payments due on their mortgages and foreclosures resulted. This began about 1923, years before the depression came to the cities. Mines began shutting down at about the same time. We never got out of the depression, these theorists hold, because the infusion of money into the economy by the Roosevelt Administration tended to hold up the speculative values of land and thus retarded the resumption of production.

This theory comes to mind now because of a warning raised in the August issue of House and Home, a Henry R. Luce publication devoted to the building trade. The entire issue is devoted to a discussion of the land question. In one of its articles it says:

"Many of America's biggest panics and depressions were touched off by over-speculation in land and a bust in land values that carried hundreds of banks and other lending institutions down with it.

"The panic of 1836 came with the collapse of the land boom along the new canals.' The panic of 1857 came with the collapse of the land boom along the new railroads; so did the panic of 1873. And the 80% drop in land prices that started in the late Twenties played a bigger part in the bank failures of 1932 and 1933 than did the 89% fall in the prices of stocks from the 1929 peak.

"A land bust in the Sixties could be even more serious if nothing1 is done to check the inflation, because this land boom is blowing up to such monstrous size. Paper prices for land, now total half a trillion dollars - nearly twice the size of the national debt, more than six times the federal tax revenues, nearly twice today's price of all listed stocks, more than twice the resources of all our commercial banks.

"If this bubble can be deflated quickly and how, little harm will be done. The speculators will lose their unearned paper profit, but that is about all."

Then this publication goes on to warn: "If we postpone correction until much more of the land has been sold and covered with buildings mortgaged at prices that cannot be sustained, the credit structure of the country will be deeply involved, as it was before 1932."

Since House and Home caters to the building trades it touches but lightly on speculation in farm lands, but gives some instances of how land sites in the cities have risen in price:

"In San Francisco, Big Builder Henry Doel; paid $580,000 for a tract that was offered $15,000 in 1948; Peterson & Moretti are paying to $10,000 a quarter acre lot for developed land [on] the old Mills estate that sold for $2,000 an acre in 1952.

"On Long Island, NAHB [National Association of Home Builders] Vice President Leonard Frank says builders are paying $16,000 and more for raw acreage they could have bought for $3,000 in 1950.

"In Miami, Builder Gene Fisher is paying $7,500 an acre for land he could have bought for $500 ten years ago.

"In South Jersey, NAHB Past President Carl Mitnick says the farmer who bought 60 acres and a house for $20,000 in 1948 has just turned down $360,000 for the land without the house. Mitnick himself had just sold another builder for $40,000 ten acres in Colwyck that cost him $3,000 fully developed in 1949.

"In the sagebrush east of El Paso, lots are selling for $795 that Arthur Rubloff bought in 1956 for $9 an acre.

"In the Twin Cities, MBA [Mortgage Bankers Association] Past President Weber Nelson closed out a land syndicate at 200% profit on the prices it paid in 1954.

"In Hawaii, apartment sites 50' x 100' near Waikiki Beach sell for $200,000, and land 15 miles from Honolulu that sold for $1,200 an acre before statehood is now selling for $20,000.

"Forty miles from downtown Los Angeles the Federal government got $19,000 an acre at auction for the Santa Ana Air Force Base it bought in 1942 for $350 to $5000 an acre."

And so it goes. Land prices have jumped all over the country. But, do these high prices represent a shortage of sites? Not at all. Land speculation hits the centers of population, or their perimeters, first; it is the more desirable city sites that are the primary objects of speculation. That pushes the prospective builder to the outside, where the price of land is still within the reach of consumers. The result is the uneconomic development of land far away from the centers of population, leaving belts of unused land in between. Aerial photographs of all our cities show "suburban sprawl" - the haphazard development of areas at some distance from the places of employment, causing the home owners unnecessary travel time and expense.

"Suburban sprawl," says House and Home, "is why Los Angeles home owners must drive 25 miles to Azuza while land much closer to downtown is being held off the market by land speculators who think they can sell it for ten times the 1950 price in 1970 instead of taking five times the 1950 price today."

What land speculation does is to create the illusion of scarcity. "Today's fancy prices can be kept high only as long as the illusion of scarcity can be preserved, as long as each buyer thinks the land he pays too much for today would cost more - and sell for more - tomorrow." That is, as long as the speculative psychology holds on. "But what will happen when the inevitable day conies when land prices can go no higher and speculators try to cash in on their paper profits? What will happen and who will get hurt when this land-price boom collapses - as every other land-price boom has collapsed?"

The publication then quotes from Professor Ernest M. Fisher's classic study of premature subdivisions: "It takes nearly 30 years to produce a new generation that has had to learn by pain and disappointment that while many fortunes have been made in real-estate, many paupers likewise have arrived by the same route."

In the meantime, before the crash, what is land speculation doing for the economy? "In the suburbs," says House and Home, "sky-high land prices are driving home builders further and further out to find land cheap enough to build on profitably. This further out land costs twice as much as land close in just a few years ago. It costs twice as much to connect with existing streets, sewers and utilities. It takes a much bigger slice of the home building dollar -19% today for far out lands vs 12% for close-in land in 1950. The high cost of getting home to this further-out land is a big factor in housing expense . . . and this in turn is driving many who would like new houses to move into apartments or stay where they are."

"In the cities," the story continues, "high land prices are the No. 1 reason private enterprise cannot build good new housing for middle-income families, high land prices are the No. 1 excuse for subsidized public housing, and high land prices are the No. 1 justification for asking taxpayers to subsidize slum clearance by buying out the slumlords at up to three times the re-use value of their land . ...

"Since 1950 building material prices have climbed 24%, building trades wages have risen 60%, but land values for home building have soared anywhere from 100% to 3,760%." Thus, land speculation tends to hold down the building of new houses, which, as everybody knows, is an indicator of the health of our economy. Every new house put up or started means orders for steel, lumber, cement, paint, a thousand and one items that go into the structure, which in turn means jobs for many workers in many industries. Land speculation is a barrier to the building of houses and therefore a block to progress. Every house not put up because of the cost of land is a loss to the economy.

To add insult to injury, the taxpayer, under our Federal housing program, is asked to help meet the price demanded by the land speculator. Where the government foots the bill for the construction of some housing project, it is the taxpayer who is required to dig down into his jeans for the price of the land. Where the government guarantees the mortgage, the tendency is for the bank to be more generous in its appraisal of the value of the land on which it makes its loan; and since the government has nothing but its taxing power to support its guarantee of the mortgage, the effect is to make the taxpayer underwrite the speculative value of the land. There have been "scandals" exposed, showing how land speculators have boosted beyond all reason the value of the land on which government-guaranteed mortgages have been written and have pocketed the increase; but there is nothing that can be done about this practice under our land tenure system.

WELL, what can be done about land speculation? The answer, says House and Home, lies in the revision of our tax system. "Today's taxes often make it more profitable to misuse or under use land than to develop it and use it properly. They penalize land development, land improvement and home building by (1) multiplying the local taxes the owners must pay as soon as new buildings are built on his land or existing buildings are improved, and by (2) taxing away most of the profit from land development and home building at ordinary income tax rates. But they subsidize land speculation by (1) undertaxing the land as long as it is left idle or under used, and (2) taxing the profits of land speculation less than half as heavily as the profits of land development and home building are taxed."

Let us consider the subsidization of land speculation "as long as it is idle or under used." The price of land is based on its probable yield if it were rented. To explain this statement, let us make an analogy with the price of an industrial bond. All things else being equal, the price of the bond is determined by the capitalization of its yield. Thus, if the going rate of interest is 5%, and the bond pays $5 per year, it will probably sell for $100. If it pays $8 per year, and the going rate of interest is 5%, its price on the market will be about $150.

So it is with land. The value of a site is fixed by what it will yield in rent. Thus, if a piece of land on which a building rests rents for $1,000 a year (and assuming the going rate of interest is 5%) , the land, without the building is worth $20,000. That is what the owner of a site, similarly situated, will ask for his land. The price of land is_the_ capitalization of its rental value.

Now, a tax on land value is really a tax on the capitalization of its rental value. A tax on land value absorbs some of the possible yield. The land owner cannot capitalize what he does not get, what the tax collector gets. So, the selling price of his land is decreased by the amount of the tax on it. If all of this rental value were taxed away, then the selling price of his land would disappear; it would be worth nothing.

That is what House and Home means by the subsidization of land speculation: the low taxes imposed on land which is left idle or uneconomically used. Uneconomically used land is land which supports a slum or a building inconsistent with the value of the land, sometimes called a "taxpayer"; you know the land is uneconomically used when you see along side of it a big office building or a hotel. If the taxes on unused or economically unused land were raised to the level paid by land which has an adequate building on it, the owner would be forced to improve his land accordingly. He would be forced to improve his land because that is the only way with which to pay his land tax. He would have to get it out of the space he rented. If, in addition, taxes on improvements were lowered, that would be further inducement to build on his land. There would be more money in renting building space than in land speculation - if land were heavily taxed and buildings were untaxed or taxed at a lower rate.

Says Professor John Henry Denton, in charge of real estate studies at the University of Arizona: "The only cure for land speculation is to eliminate the extraordinarily favorable tax treatment accorded the land speculator. No justification for this can bs found in economic theory. Unlike speculation in commodity futures or common stocks, land speculation does not support a market or provide a stimulus for production. In fact, it has just the opposite effect. It destroys the marketability of large areas of land by pricing them out of the reach of immediate users. It deprives our communities of many facilities for good living (such as parks and playground) by driving the land beyond what the communities can pay. It limits competition by holding a large part of the land supply off the current market. It channels capital funds from productive investment into sterile adventures and may be responsible for the present day dearth of private risk capital."

He might have added that land speculation does the economy no good.