The nation’s homebuilders have consistently innovated in an effort to provide high quality product at a price people can afford. Factory produced, framed housing is a type of housing experiencing an expanding market. What homebuilders cannot manufacture is land. Land has what in economics is referred to as an “inelastic supply.” Another characteristic of our land markets is that they are dysfunctional. Increases in demand result in increasing asking prices but not necessarily an increase in the amount of land brought to the market. The reason this occurs with just a few exceptions across the United States is the low effective rate of taxation on the value of land (by value I mean the potential annual rental value, not the potential selling price).

Because land, unlike buildings, does not depreciate over time and does not normally require ongoing expenditure of funds for maintenance, land is a very attractive asset for speculation. Look around in every town and city and one sees a good deal of vacant land. Some of this land has been vacant for years or decades, in part because the annual cost of holding land idle is almost everywhere quite low. Those assigned to assess property for purposes of taxation rarely assess vacant land close to its current value.

The solution is a solution resisted not only by speculators in land but also by existing owners of land that is improved with a housing unit or other building. Under the current system of property taxation almost everywhere the property owner tends to experience an increasing net worth over the years, even as their building is depreciating. The measure that would tame our land markets will halt the increase in land prices and over time bring prices down. Property will become more affordable for everyone. Long-time property owners will have to save and invest elsewhere to build net worth.

The change I am referring to is generally referred to by several different terms. One is “land value capture.” Another is “land value taxation.” The specific idea is to exempt all buildings from the tax base and impose an annual tax on whatever land is held equal to its potential annual rental value. This can be done gradually, say, over a ten-year period. Depending on how swiftly the shift occurs, land prices will begin to stabilize then begin to fall.