Saturday 1 October 2016

A land value tax will free space for building

Ronan Lyons

Published 10/04/2016 | 02:30

The last few weeks of this column have highlighted four different areas where government policy needs to be reformed if we are to enjoy a healthy housing sector in this country - one where everyone has access to a good quality home, regardless of their income, and one which does not pose a threat to the rest of the economy.

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The first of these areas is tweaking the mortgage caps, so that they don't encourage sprawl, while the second is auditing and reducing the costs of construction, so that costs are connected to the real economy in the same way that mortgages, and thus house prices, are.

The third is putting in place a simple universal housing subsidy, which would be based on disposable income and construction costs and which would bring about the desired situation where social housing increases when the need is greater, rather than decreasing.

The last area is about reforming how we use land. Last week, I gave the example of the Dublin Bus depots, multi-acre sites in valuable locations that are completely disconnected from the logistics of how Dublin Bus currently operates. The only thing they have in common - apart from Harristown - is that they were all Dublin United Tramway Company depots in the 19th century. Instead of a 'best use' land policy, this country is plagued with a 'last use' land policy.

In order to make housing in bigger cities affordable, the trick is to use land well, ie, to continually question and revise the restrictions we put on land use. For example, manufacturing comprises an ever-smaller part of all developed countries' economies. The vast bulk of economic activity is now in services.

However, many cities - Dublin included - still have vast tracts of otherwise valuable land retained as low value or indeed vacant industrial space.

A good example within Dublin City Council's limits is the Dublin industrial estate near Glasnevin. This 170-acre site is a low-density half-used mish-mash of retail outlets, Baptist churches and some last remaining industrial units.

This is a site that could provide thousands of new homes, close to O'Connell Street, DIT, the M50 and lots of green space. Perhaps more astoundingly, given that there are no plans to rezone this, the new cross city Luas extension will terminate in this half used industrial estate. Clearly, this Luas extension would be much more valuable if the radius of its terminus was actually fully inhabited.

To see why we are where we are, consider the incentives of Dublin City Council. There is no gain for it to rezone the land as residential because such a rezoning has no immediate consequence for those who occupy the site currently. Indeed, if DCC rezoned, there could be pressure for it to go down the route of a compulsory purchase order in order to convert the site out of its existing use.

A neat work-around is a land value tax, a tool that is used effectively in many other jurisdictions to get land used well. This would replace commercial and industrial rates, stamp duty and indeed local property tax. In tandem with local authority zoning and development plans, land value tax would facilitate a city's evolution year on year.

With hundreds of thousands of vacant square metres dotted around the M50, the market value of this industrial land is close to zero. If this land was rezoned for a mix of residential, commercial and public uses, its value would be somewhere between €1bn and €3bn. If we call that €2bn, a 5pc land value tax would yield €100m a year. This is value that society - including Dublin City Council - has created but the council is allowing to lie fallow in a half-used industrial estate.

When asked about this, Dublin City Council policymakers say that such a plan would be unfeasible, because of what is known as 'site assembly' issues. This can happen where many different people own different parts of a site of interest. But this is to think in terms of how the council currently work, ie compulsory purchase orders.

A land value tax switches this responsibility on to those who would develop the site and, more importantly, those who own the site now. If you are in the lucky position of owning a small fraction (say 1pc) of a site worth €2bn and which would yield €100m a year in land value tax receipts, your land value tax bill would be €1m. The vast majority of those who own sites in the Dublin Industrial Estate would happily take the windfall of selling up and find a much cheaper site on the M50 ring. Land value tax does much of the hard work of site assembly automatically.

One final note is that this would have to apply to public land as well as privately owned land. Is it sensible to use so much of our scarce and valuable land to have so many barracks in central locations? Why does Dublin City Council allow so many small sites it owns to lie derelict or vacant? And why not encourage government departments to think long and hard about whether they need city-centre sites or if they can locate elsewhere?

By lowering the cost of land and making more land available for residential purposes in central locations, if needed, the average price of a home need not be any higher in Dublin than elsewhere in the country - as was the case before the 1980s. However, to do this, we need to think not of land as a speculative asset but as a service with huge value. Land is valuable because of society's efforts, not the efforts of the owner. Society should get its cut.

Ronan Lyons is Assistant Professor of Economics at Trinity College and author of the Daft.ie Reports. He is giving a talk, 'Memory, Lack of it, and the Irish Housing Bubble', at the Trinity Week Public Symposium, in the Neill Lecture Theatre, Trinity College, Tuesday, April 12, 4.30pm.

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