11. Affordable Housing
There can be no fairness or justice in a society in which some
live in homelessness, or in the shadow of that risk, while
others cannot even imagine it.
We live in a world of abundance yet simultaneous poverty. We can no longer blame famine, war, or lack of technological progress for the poverty that remains an inextricable part of human experience. Nor can we blame a debt-based monetary system alone for our state of affairs. Although money buys power, it can only do so, by and large, in an economic system in which wealth cannot easily be created due to the ownership and hoarding of land. Human beings need land even more so than they need money; the monopoly of land—not the monopoly of money—is the primary driver of poverty and inequality. Once we understand that the issue is lack of affordable access to land, and therefore to community, we understand why the value of land has to be shared.
Economists worldwide have already laid much of the scientific groundwork for the effectiveness and validity of community land contributions. People unfamiliar with land contributions often wonder if these contributions will raise the cost of housing. However, as we shall see in this chapter, land actually becomes more affordable because land will no longer be hoarded. And since revenues from land contributions will diminish or even eliminate the need for conventional taxes, goods and services will become significantly more affordable. The end result is that homeowners are likely to incur net savings due to diminished or eliminated taxes and considerably lower costs of living.
Community land contributions only burden property owners who don’t put land to efficient use. Tenants are unaffected because tenants already pay for the benefits they receive from the communities they’re living in, except that they’re paying their landlords instead of their communities. In other words, since tenants already pay land contributions to property owners, land contributions are already included in landlords’ profits if they rent their properties out; if property owners try to pass community land contributions on to their tenants, and thus charge tenants twice for the community benefits tenants receive, they’ll find that the property rental market will simply accommodate the tenant with another property owner who’s willing to accept less of a profit.
Nevertheless, community land contributions provide a win-win for everyone, since real-estate developers can still gain from the value of the housing they provide; they just won’t be able to profit as much from land anymore. And because community land contributions will lead to an overall increase in wealth for society while preventing a greater increase in the cost of living, community land contributions are extremely beneficial for tenants as well.
Our current laws and practices don’t support the dream of affordable housing for the average person. Meanwhile, homeowners with expensive mortgages are burdened by their liabilities; our current system doesn’t easily allow them to sell their homes and rent instead. Flawed economic policies meant to encourage homeownership—and thereby land ownership—are rotten at their core because they’re built on the assumption that land ought to be owned and profited from. As a result, such policies gear us to consider short-term self-interest at the expense of common interests, and therefore at the expense of our own long-term self-interest.
One way for communities to create affordable housing is for local communities to adopt land-use rights. To accomplish a transition toward such a model, either local governments or community land trusts would provide financing to homebuyers, who would then make land contributions on their properties in perpetuity. As a result, communities would get reimbursed for the goods and services they provide to homeowners, while property buyers would primarily become home buyers, not land buyers. This way, the price of real estate can potentially decrease anywhere from 10 to 70 percent, depending on the conditions of the local real-estate market, and everyone wins.
Let’s use a practical example: If a property sells for $250,000 but has a house on it that’s valued at $100,000, we know that the property’s land (or location) value is $150,000. Accordingly, a homebuyer of a $250,000 property pays a premium of $150,000 just for the privilege of living in a certain community. That premium, however, doesn’t flow into the pockets of the community in which this property is located: The previous owners as well as the financial institutions that have provided financing along the way have pocketed this premium instead.
Let’s take our example a bit further: Two people, John and Susan, each decide to buy a condominium in that location for $250,000. For the sake of simplicity, let’s assume both John and Susan make a down payment of $50,000, or 20 percent, toward the property. To pay for the $200,000 remainder, John opts for a thirty-year mortgage at an interest rate of 5 percent, while Susan opts for a land-use right. Her local community, in order to promote affordable housing, provides Susan with $120,000 in cash for the property’s location value as well as a thirty-year mortgage at an interest rate of 5 percent for the remainder of $80,000 in exchange for issuing Susan a land-use right.
As soon as Susan buys the property—now tied to a land-use right—the property’s selling price decreases significantly, because whoever owns this property from now on is forevermore obligated to make a community land contribution based on the location value of this property. So while John’s condominium continues to be priced at $250,000, Susan’s condominium is now priced at only $140,000, a reduction of 44 percent! Meanwhile, John pays a total of $1,036 per month in mortgage interest and property taxes during the first year; Susan, however, only pays a total of $731 per month in mortgage interest and land contributions.
Let’s take a look at the money flow for the next ten years. Whenever land is bought and sold, three stakeholders automatically vie for a cut from the revenue that can be had from land: the community, the property owner, and the institutions that finance property ownership. When land increases in value, these increases are always distributed among those three stakeholders, depending upon how the value of land is divided.
Assuming an average land-value growth rate of 2 percent per year and a general interest rate of 3 percent, a $250,000 condominium with no land-use right might cost $283,000 in ten years. A land-use right property, however, will still only be priced at $149,000, even after ten years. The advantages to future homebuyers immediately become apparent: With real-estate prices once again affordable, new homeowners can put their money to other uses instead. Meanwhile, land contributions for this property will have increased from $400 per month to about $478 per month (community land contributions generally tend to increase over time the more a city grows).
John pays a total of $897 per month in mortgage interest and property taxes during the tenth year, while Susan makes combined mortgage interest and land contribution payments of $753 per month (see Table 11-1).
TABLE 11-1: MONTHLY COST OF LIVING COMPARISON FOR THE TENTH YEAR
In John’s case the bank will take the lion’s share of the land value via mortgage interest payments. With land-use rights, meanwhile, the community will be much better off: The revenue collected on behalf of the community during those ten years comes to about $53,000, more than twice of $25,000, which is what the community would have otherwise collected in property taxes (see Table 11-2).
TABLE 11-2: TOTAL EXPENSES DURING TEN YEARS
In order for our land-contribution model to be complete, we have to consider two more aspects in our affordable-housing discussion. First, we have to minimize the inequality between tenants and landowners, and second, we have to provide the landless—the homeless—with guaranteed access to land.
Currently, property owners can profit from land while tenants cannot. Because tenants aren’t able to profit from land, they usually end up being gentrified out when rents increase. Unfortunately, in our current economic model there are few things communities can do short of implementing rent control to prevent rents from increasing; higher rents are a natural byproduct of increased affluence for a given area. Because this affluence is only pocketed by property owners and financial institutions and not shared with all residents, rent control often seems like the least bad option in the fight against gentrification. But rent control comes with a host of negative side effects, including a shortage of housing and lower-quality housing, and doesn’t serve the community in the long run.
What’s required is an entirely new mechanism by which higher rents are shared with all residents—property owners and tenants alike. One effective way to do this is through the issuance of a partial Universal Basic Income to all residents, financed entirely from community land contributions. A Universal Basic Income, only when exclusively derived from community land contributions, has the effect of preventing gentrification: When tenants receive a Universal Basic Income, they’re able to afford the higher rents, which they pay to their landlords, who in turn have to pay more money to their local community and provide better services to their tenants. The community, in turn, then shares that added revenue with all community members—and everyone wins.
Having one’s own home can tremendously ease one’s mind in a way that few other things in life can; the homeless are often painfully aware of this reality because they lack that psychological security. While some people tend to believe that the homeless are either lazy or mentally incapable of earning enough money to afford a place to live, few people consider the principle that land has to be shared with all human beings—regardless of whether a person contributes to society or not. This is because no human being has made land; therefore no human being has a justifiable right to marginalize another person from land. Furthermore, all of us need land, just like we need air to breathe.
Since everyone has a basic right to land, it’s society’s duty to provide a minimum standard of free land access to all its members. It can do this for property owners, and tenants by providing them with a Universal Basic Income; the homeless, however, should also be given the option of free public housing (the cost of which can be deducted from their Universal Basic Income share) so that they can have accommodations without living in fear of being evicted. To provide the homeless with free housing also makes sense on a financial basis, since the cost of providing housing for the homeless often tends to be significantly less than the actual welfare costs and societal burdens that are created by homelessness.
Land is a universal human right. Consider how important it is for the human mind to have a ground to call its own! But in order for everyone to have their own ground, the value of land has to be shared, and housing has to be provided to those who live on the margins.
Land belongs to the people, yet the homeless are not only homeless—they are landless. Their poverty is less a reflection of their inability to sufficiently provide for themselves in a predatory economic system, and much more a reflection of our collective ignorance. Once we realize that everyone has a right to land—and therefore, to shelter—and once we realize how we commoditize this right to the highest bidder, it becomes apparent how we each are complicit in each other’s poverty. It is therefore up to all of us to do our part in alleviating poverty and creating, in the words of Charles Eisenstein, “the more beautiful world our hearts know is possible.”
- Economists throughout history have clearly stated that land contributions will not raise the rents of tenants but will eat into the
profits of landowners, who do little work for the income they receive. Adam Smith recognized this back in 1776 in his work An
Inquiry into the Nature and Causes of the Wealth of Nations:
A tax upon ground-rents would not raise the rents of houses.
It would fall altogether upon the owner of the ground-rent, who
acts always as a monopolist, and exacts the greatest rent which can
be got for the use of his ground. . . . Whether the tax was to be
advanced by the inhabitant, or by the owner of the ground, would
be of little importance. The more the inhabitant was obliged to
pay for the tax, the less he would incline to pay for the ground; so
that the final payment of the tax would fall altogether upon the
owner of the ground-rent.
- Assuming a property tax rate of 1 percent, $150,000 is the privatized location value of the property, claimed by the property owner. If the community collects a property tax of 1 percent on this property, and assuming an interest rate of 3 percent, the property’s untaxed location value is $200,000, $50,000 of which is collected by the community.
The following calculation is for the interested reader (see the Appendix, The Math behind the Science, for more details). We can determine the property’s pure location value with no property taxes using the following mathematical formula: Ptax equals the property’s privatized location value of $150,000, which already factors in a property tax, P is the property’s location value without a property tax, i is the current interest rate (in this case 3 percent), and t is the current property tax rate (in this case 1 percent).
- If a community land trust is involved instead of a municipality, the community land trust holds title to the property and then sells to Susan an exclusive and transferable land use right (for more information, see Endnote 49). Thus, the community land trust either pays $250,000 to the previous owner or receives the property as a donation from the previous owner, then sells to Susan an exclusive land use right for $130,000. Susan could either pay $130,000 in full or make a down payment of $50,000 to the community land trust and repay the remainder to the community land trust over time.
- This new price makes sense, since Susan herself only paid
$130,000 for the property. While Susan could immediately resell the property for $140,000 and make a profit of $10,000
through arbitrage after paying off her mortgage, her take-home
profit will be negligible after closing costs and time and energy
spent. The reason her new property sells for $140,000 and not
$100,000 (which is the original sales price of $250,000 minus
its location value of $150,000) is because the new property price
contains the building value of $100,000 as well as a privatized—
but significantly reduced—location value of $40,000 (instead of
$150,000). The reason this property’s sales price still contains a
privatized location value is because in our example the community
captures most, but not all, of the property’s location value through
community land contributions. It’s generally good to leave some
of a property’s location value to existing property owners in order
to factor in market fluctuations and to help owners pay for real-
estate transaction fees.
- The property’s periodic location value—its rent r—can be approximated using the property tax-free purchase price of land P
and the prevailing interest rate i (this formula assumes that the purchase price of land does not contain a speculative component):
- If the local community collects 80 percent of this periodic location value, the new property owner would be obligated to pay
$4,800 for the first year, or $400 per month.
- This brings to mind an anecdote: A friend of mine paid for
a rent-controlled apartment in San Francisco and left it empty
while he lived elsewhere for a year. By retaining his rent-control
privilege, he was able to avoid paying a higher rent upon his return
to San Francisco and ended up saving money despite having paid
for two apartments for an entire year. Laws against such behavior
are futile; but if we change the underlying economic incentives, we
can avoid the need for such laws altogether. For a good microeconomic perspective on the side effects of rent control, see http://
- For example, the annual cost of emergency room visits and jail
stays for the homeless in San Francisco was estimated in 2004 to
be approximately $61,000 per person, whereas the cost of providing a homeless person with permanent housing, treatment, and
care was estimated at only $16,000. See Angela Alioto, et al. “The
San Francisco Plan to Abolish Chronic Homelessness,” June 30,
2004, San Francisco Mayor’s Office of Housing and Community