So-called rising house prices mainly represent rising land prices. Note – ‘land prices‘, not land values! Land prices may not represent true value when they are pathological, especially in real estate bubbles such as are currently being experienced in China, Canada, New Zealand and Australia.
Rising land prices are always attributed to inadequate supply, as a result of inadequate subdivisional land release, zoning controls, or increasing population–or combinations of these–but supply is often not the main reason for rapidly rising prices. There can be, and often is, a surfeit of land supply, but prices may continue to escalate upwards. In fact, this is the situation in Australia at the moment.
How can this possibly be so?
Mainly because the predominant reason for an upward movement in land prices is the inadequate capture of land rent, by use of municipal rates, or land tax at the state level. When these are increased, that is to say, a greater amount of land rent is captured for revenue, land prices will stabilize or fall, because land prices represent the private capitalisation of the uncollected land rent, and, if less rent is being privately-capitalised, land prices will decline. This fact is often too difficult for us to get our heads around, even for economists, because we are used to all prices being analysed only in terms of supply and demand. Land is different from commodities, insofar as its income is in the nature of a rent which can’t be passed on in prices.
This vital information usually goes missing in considerations of housing affordability and tax reform because 99.5% of the community is ignorant of it.
However, some people–and banks particularly–might be quite uncomfortable to believe that land prices should decline rather than increase if the nation is to be more productive and not go down the gurgler.
As they say, “Ignorance is bliss!”