To Those Who Seemed Confused About Home Values

Carl F. Shaw

[Reprinted from GroundSwell, September 2012]

Almost everything ever manufactured eventually declines in value—from the day it is created.

Except for fiberglass sailboats, diamond necklaces, gold watches, Stradivarius, Guarneri and Amati violins everything eventually deteriorates to junk and loses its value.

This applies to houses, furniture, appliances, clothing, autos, tools, etc. etc. Some broadcasters and politicians seem not to understand the above concept. Now-a-days I have heard public type people say, “ Home values are increasing.” The only way a building, be it a residential home, factory, or commercial store can actually increase in value would be for its owner to add space to the structure—make an additional bed room, bathroom, garage, or 2nd floor, etc. From the day a new building is occupied it begins to depreciate and lose value. Houses do not normally appreciate or gain value unless added to.

Improvements are different than land. All buildings are erected on land, (except houseboats) . Land value fluctuates -- it never depreciates. Land has value due to its location. And Land has two types of value --

• an annual value called RENT.
• a sale value resulting from the capitalization of un-taxed RENT.

The property tax collects only some land RENT here in the USA, (but still more than most other countries.)

RENT happens because some people are willing to lease a good site for their purpose and to annually pay an owner for its use. The better the site, the more an owner can ask. There is little demand for rural land, which can be leased for only a few dollars per acre per year. Urban sites can yield several dollars per square foot per year, which is thousands of dollars more that rural. (an acre contains 43,560 square feet.)

Let’s suppose that a given land parcel could lease for $100 per year.

And let’s suppose the annual RENT is taxed about 10%, or $10.00.

That leaves the owner with $90. net income.

I mentioned the term capitalization—that is the process of turning net income into a sale value, by way of a simple formula.

The formula is – net income divided by the current interest rate, which will then equal the sale price.

The net income of $90.00 is divided by the current interest rate of 3.5%.

The result gives us a likely sale price of $2,571.42. The owner could sell this lot for $2,571.42. When all the RENT is taxed land will no longer have a sale price.

The owner did not make the lot. Neither did he make the RENT.

God told us never to sell Her/His land. The low property tax allows a net RENT to occur, giving the owner a sale price. God told us that She /He created the earth. Some sites of the earth are more useful than other sites, resulting in higher RENT. God NEVER placed a dollar value on any of Her/His land. People – society places a site rent on valuable land, depending on location and usefulness. This is OK—there is nothing immoral about leasing land according to location value. But in as much as RENT is a social product, all the RENT should be taxed and shared by everyone. Our present tax system creates land profit for owners, high cost, and shutting out land possession for most of the earth’s people. High cost results in unemployment, poverty, out-migration, homelessness, and foreclosures.

By 2007 American land values had reached a near all time high. Since 2008 some values have declined. This year in some locations land values have begun to slightly increase. The media thinks this recent slight rise in land value is a good thing. They have a short memory. When land reached such high value in 2007 labor and capital could no longer afford to buy or lease land in order to produce wealth – their daily wages.

High land values resulted in economic distress.

Depressions are caused by the high cost of land—not by Wall Street, capitalism or any political party. The media complains when gasoline price reached nearly $4.00 per gallon. But when some land values recently increased, the media seemed happy. The media does not think. The original immigrants who came here in 1620 found free land. This condition encouraged many other immigrants. Free land resulted in jobs, high wages, more immigration.

The engine of economic growth is decreasing land values. Land can be made free again. The media should recognize the difference in building value which always depreciates and land value, which never depreciates, constantly changing and happens when some annual site rent goes untaxed.

Tax the land!