Freehold – Poverty and Volatility
Home and hold are deeply significant to Tasmanian culture. There is a status associated with the ownership of land that is significant not only because of the security that it lends, but because of the prosperity it tends to bring. In some ‘magical’ way, those who own property get ahead faster than those who don’t. But on inspection it is clear that this is not magical; it is the inevitable result of the form of land title dominant in this state. As a direct consequence, a divide grows between those who hold land and those who cannot or do not. This occurs for a very simple reason, and it has to do with the source of the value we place on land.
The value of land – as opposed to the structures built upon it – has three components: the natural productivity of the land itself; the utility of the land provided by the services accessible from it; and the expectation that productivity or utility will change over time. The first element is the value of the bounty that the natural productivity of land provides. The second is primarily related to the value of the services provided by and presence of community. The third is speculative in nature and contributes directly to the tendency of land price to bubble during a boom, and collapse during a bust. While the natural productivity of land can be improved by the action of its owner, only a small portion of the value of non-agricultural land is derived from its bounty. In both other cases, our actions as owners of the land are normally only of minor significance to its value. Changes in the value of land are in large part not due to any action of the landowner.
Freehold title — the most common form of land title today — confers upon the owner a perpetual monopoly right to both the use of the land and any change in the capital value of that land over time, in exchange for a capital sum. Now a monopoly is fundamentally a function of government; quite a different construct to private property rights which are a function of law. Thus ownership of land is quite different to our ownership of a made object, although we often think of them in the same way. The pertinent result of this difference is that we end up with a free market pricing system for land that doesn’t function properly when faced with an unexpected change in situation.
When something unexpectedly good occurs, property owners benefit threefold. This benefit is almost always associated with the utility of the property, and may be as diverse as a better ferry service or a supermarket opening up nearby. First, they receive a beneficial utility from the community that they didn’t pay for – they paid only for the right to be in the position to receive it. Secondly, due to that benefit, they receive an increase in the capital value of their land equivalent to the present value of that utility existing into the future – the classical land windfall. Finally, they will often receive an increase in value due to speculation that the situation will remain better than expected — the boom. Of course, the inverse happens when something bad occurs. When an event like the Brisbane floods occurs, people lose the utility of their land, their land value plummets and sales slow on the speculation that prices will drop further.
Neither of these market responses is what you would want to occur from a societal perspective. Both are self reinforcing rather than self limiting. One leads to ruin in the long term when the unsustainable price collapses; the other to ruin in the short term from individual loss.
Flowhold – Equity and Stability
The resolution of both our current situation and this market error in general lies in recognising what land ‘ownership’ actually is, and treating it as such. It is a monopoly right, and for a community to get proper value out of allowing a monopoly, it needs to be priced on a continuing basis, accurately reflecting the value currently placed on the benefit provided by that monopoly. If effect, it requires a change of payment methodology from a single capital sum to the payment of an ongoing levy. In addition to this, recognition of what that levy inherently covers changes some things.
To do this, we here introduce the concept of Flowhold Title.
Flowhold Title grants:
- Title / ownership of the property for an unlimited time period
- Capability for the title of the property to be transferred to family members.
- Government guarantee to the flowhold title
- Freedom of the owner to:
- Occupy the property;
- Rent the property;
- Leave the property vacant;
- Sell the property.
- No further government charges will be levied over and above the statutory payment. Nor shall charges for infrastructure provision be levied by a private operator where that infrastructure is publicly funded or due a public dividend. Any charges that would be levied fall due to the State Government. Examples include but are not limited to:
- Land Tax;
- Stamp Duty;
- Council Rates;
- Infrastructure Charges such as water, power, and communications.
In exchange for:
- A monthly payment flow, equal to the current cost of the capital otherwise required to purchase the land asset, assessed and adjusted each month.
This arrangement markedly changes the nature of the market. If an unexpected change occurs, the asset value and the beneficial utility go in opposite directions. The asset value In short, under freehold the ‘house and land package’ gets split up – you pay the bank for the house, the government for the land, and speculation is eliminated.
From Free to Flow
The current property market situation provides a significant opportunity to introduce flowhold title. It will become increasingly apparent here, as it has elsewhere around the world, that the current system has weaknesses. Fears of loss during market busts provide a significant driver for change for established home owners looking to preserve at least some of the value they have built up. The first home buyer will also see benefit in requiring a loan only to cover the value of the home, not the land it is built upon.
Proposals for the transition mechanism include:
- The provision to landholders of an option to convert existing freehold title to flowhold title in exchange for an offered capital sum;
- The provision of an option upon land purchase to convert to flowhold, resulting in a reduced capital or loan requirement to purchase;
- The transfer of property to flowhold in exchange for a proportional share of the overall levy;
- The direct transfer of state, crown and other public lands to flowhold.
Of note, all of these mechanism are of a transactional nature and as such mark this as quite distinct from a tax. The government is purchasing an asset back that naturally suits government stewardship. It is a significant asset though – the land in Tasmania is worth about three times as much as the governments asset base, so the process will necessarily be gradual and extended in duration.
A Future that Flows
So a generation or two passes, and the majority of land transfers to Flowhold title. What sort of things would we notice that were different than they otherwise would have been?
- The use of land will have less arbitrary limitations. Any arbitrary limitation reduces the value of land, and thus the return on land. Interestingly, there is also likely to be more diversity and character to different areas as that also adds value to the land.
- Land will be better utilised. One of the tendencies with Freehold land is that after a time, it becomes inexpensive to hold land vacant. Holding land vacant introduces a level of artificial scarcity driving up capital prices. That practice will cease, and land will move relatively quickly to its best use. People will move more frequently as their needs change as the costs of moving are reduced.
- Changes in circumstance will be tempered. There will still be times of growth and times of consolidation, but the wild swings will be missing.
- More private capital will be available for productive use, rather than tied up in land.
- More infrastructure will be built privately, as a non-intrusive, non-limiting mechanism for recognising and measuring the actual difference infrastructure makes is introduced.
- Revenue collection will be more efficient. One of the things about this sort of levy is that the costs associated with levying it are relatively low compared to taxation. So a greater proportion of the monies collected will be available to be fed back into the community.
Flowhold title won’t immediately, or even over time, bring about some utopian sort of future. It will lead to some distinct, and advantageous changes in society over time – where people are more cognisant of the difference their actions make to the community at large. It will lead to a fairer society, without a poverty inducing disconnect based upon the ownership of land. It will lead to a number of small but significant economic advantages. It allows a gradual change in perspective that will let our communities.. flow.