This piece runs through 3 sections:
- State Sponsored Speculation
An outline of our dysfunctional urban development model and the trouble with land value tax.
- The High Line Effect
A look into property price inflation around the New York High Line.
- A Smart Commons
An outline proposal for democratising the tools of public investment, and why it could be crucial for the climate transition of our cities.
1. State Sponsored Speculation
How we invest in our cities is broken.
When we use public money to build new parts of our cities — think roads, pipes, parks, schools, or train stations, the aim is to kick start funding for housing or other infrastructure to flow in. Large house builders and real estate developers then buy up land nearby to capitalise on these public goods by speculating on that land, or failing that, doubling down on profit by building as fast and as cheaply as possible.
The justification for this upheaval and remodelling is that the money the public puts in will eventually be paid back through jobs or taxes. Yet the pay back often falls short of the public investment, and creates huge social costs along the way.
As government resources continue to be cut back, the public sector has become locked into funding new infrastructure by inflating the housing market, and picking up the costs it creates. Not only does this benefit a smaller and smaller group of people, it produces an incredibly narrow vision of what our cities could become — the car dependant, identikit apartments, with copy-and-paste high streets, and privatised public space that are currently filling up the peripheries of our cities with low quality, unsustainable neighbourhoods.
This isn’t a productive way to make our towns and cities better — this is the sponsored creation of private wealth by cannibalising public goods.
It’s not that we can’t design more sustainable and equitable cities (or that nobody is trying to) it’s that this large, top down, centralised model of investment isn’t designed for making better neighbourhoods — it’s designed to treat land value as a way of capturing and extracting wealth (something currently being turbocharged by machine learning and property valuation data). So instead of the local, adaptable and circular neighbourhoods we need, we get neighbourhoods of extraction, stagnation and loneliness — for more detailed rundown on how this works watch this explanation by Alastair Parvin.
We need a different path to the future. A path that starts by recognising public goods create private wealth.
Public Investment = Private Wealth
One of the reasons we find ourselves in this situation is that governments find it difficult to identify the different (and often conflicting) needs of individual places and communities. As a result public investment is more easily guided by large scale planning and nationwide infrastructure strategies. To a large extent this has channeled public investment into urban areas and created huge concentrations of public goods. Compound this with the increase in mortgage credit in the housing market, and decades of financial deregulation, and we start to scratch the surface of why land is now the bedrock of rent seeking in our economy.
This is a major problem. If our cities are going to be the main sites for public investment in carbon-free sustainable infrastructure, we’re going to need to rethink how the economics behind those investments work (more on that later). But to understand how we do that, we need to dig a little deeper into the economics of land and how it relates to public money.
Property Value vs. Land Value
We still think of rising property prices as growth. Yet if the same thing happened to the price of everyday goods, buying a coffee would cost you around £20 ($25…at the time of writing). Now imagine the state paid for the coffee machine. That’s not growth, that’s not even just inflation, that’s subsidised rent seeking. And it’s a cost to all of us.
So whilst it appears that property prices have been rising, it’s actually the value of what’s underneath the property that’s changed — the land. To look closer, it’s helpful to break down what we think of as property prices into two components:
Property — the cost of bricks and mortar, and the labour that put them together;
Land — the value of the actual piece of ground. This is a combination of location, planning consent, and it’s ‘resource value’ (soil quality, gold, amount of sunlight etc.).
So even though house prices rise, the value of the actual property generally remains the same (or more likely falls), since it costs money to keep it painted or to have the boiler replaced.
Government is stuck
This is not a new problem. It’s what’s called the unearned increment (buying land, waiting for the price to rise, and selling it on) and it’s something we’ve been trying to solve for almost 200 years. Most famously by Henry George in the US, and then by Lloyd George and Churchill in their 1909 ‘people’s budget’, which included a proposal for a land tax (and was unsurprisingly rejected by the aristocratic House of Lords…many of whom were land owners).
“Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains — and all the while the landlord sits still. Every one of those improvements is effected by the labor and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced.” — W.Churchill
The problem with a Land Tax
As land has proved to be one of the main ways of creating wealth, it means that it now accounts for over half the UK’s wealth — making dealing with it a political hot potato. Governments know that building public infrastructure makes the value of the nearby land go up, and that the extra value goes directly to private landowners. In fact, they’ve even write reports on it — a TfL study looked at eight new infrastructure projects (including Crossrail and Crossrail 2) and their effect on nearby house prices. They found that if you added up the amount the houses within just 0.5km of a new station would increase over 30 years, it would come to around £87bn. That’s enough to pay for Crossrail almost five times over.
Only a small proportion of this value is clawed back by the government; through things like stamp duty (3%); community infrastructure levies (4–12%); and direct over-station development (5–10%). Government also knows that taking action to try get more of that land value back will wipe huge amounts off the UK’s wealth. Not something any politician is eager to do.
This points to a more underlying truth. That while the intention of public projects might nominally be to provide better transport or more affordable housing, they are in fact a response aimed at propping up the UK’s land market by making sure demand stays high. This is the business model of land speculation, and operates at a scale of development large enough to exclude the vast majority of people from being involved. This means we end up granting planning permission to either unviable or overvalued pieces of land, then wonder why homes aren’t being built or end up being unaffordable.
Enter Land Value Tax (LVT).
LVT has long been considered a potential solution to this problem, and is seen as one of the most efficient forms of taxation; encouraging the use of land, rather than speculating on it. However, one of the main barriers to LVT is the difficulty of accurately separating out the value of property from the land it sits on. This isn’t helpful when large sums of personal wealth and savings are currently tied up in land. LVT also penalises those who own homes that have gone up in value, but who don’t have the disposable income to cover a tax.
On top of this, there’s currently no agreed method for actually calculating land value, with methods that range from basing it on sales value; predicted rental value; or in comparison to similar properties. This makes implementing LVT reliant on a way to make valuations of land on a regular enough basis to make it reliable, placing a huge administrative burden on government. Then there’s the actual question of figuring out how much land should be taxed.
Yet we think that if we are to take on the problems of our dysfunctional urban development model, we need to get to grips with how the value locked up in land can be shared more equitably. Whilst at the same time, we need a way to give people a say in how their neighbourhoods change as a result of that value (ie. when they suddenly become more expensive).
To explore this further we started investigating somewhere where this phenomenon is clearly visible — the New York High Line
2. The High Line Effect
A park in the sky
The New York High Line is one of the world’s most expensive public parks, costing just over $180m. Since its completion in 2014 it’s become one of NYC’s most popular tourist attractions, averaging 7 million visitors a year. Five years after construction started, the area surrounding the High Line was estimated to have attracted over $2 billion in investment, with its success providing the impetus for a further $25 billion investment in the Hudson Yards development. Since construction started on the High Line, properties around it have risen by over 200%, with the average two-bed apartment in Chelsea now setting you back over $3m.
Who paid for it?
All in, the High Line’s three sections combined cost was $187m — with public funds covering around 77%of this (from a mixture of New York City, federal and state government). The rest was raised by Friends of the High Line, a non-profit organisation set up to promote and maintain the walkway.
Mapping the Inflation
To understand the High Line’s effect on surrounding property prices, we analysed publicly available valuation data from NYC’s Department of Finance, and cross-referenced it with property sales data for blocks and individual plots (a detailed methodology is available ? here). This meant we could track how the values of surrounding properties have changed since the High Line’s arrival.
What’s interesting is that if we group the properties in bands roughly one kilometre wide from the High Line you start to see that between 2007 (when construction started) and 2018 (when the data ends), properties closer to the High Line experienced a greater value increase on average than those further away. So the mean property value uplift for houses within 1km of the High Line was actually 92% more than the Manhattan mean. Or to put it another way — if you owned an apartment in that 1km, you earned on average about $67,000 a year from the uplift alone. ?
This effect is even more stark when we zoom out and plot how much individual property prices changed between 2007 and 2018, within three kilometres of the High Line. On the graph below each dot represents a single property, and the stepped horizontal lines show the mean house value increase within each of the kilometre wide distance bands. We start to see even more clearly how on average properties closer to the High Line experience higher uplift than those further away, and significantly more than Manhattan’s mean property inflation.
Each dot = a property in Manhattan. Closer it is to the left = closer it is to the High Line. Higher up the chart = the more its value went up. Those coloured bands in the middle show the average uplift within each km.
You can see the cumulative uplift in value of individual properties nearby in the image below, with the height of the extruded property corresponding to its total market value. The colour of the property shows its percentage change in value over the period.
Obviously property inflation isn’t only the result of building a park. A significant part of it is driven by things like mortgage credit, or other large public projects across the city. So what we were looking for was whether it’s possible to model and visualise the link between the arrival of the High Line, the proximity of neighbouring plots, and the change in property prices as a result.
Digging into the data, if we look at what’s happening to individual properties, we can start to see where the value is changing. The animation below shows a residential property 250m from the High Line and a breakdown of its property and land values between 2007 and 2018. These were calculated using the assessed market value from the NYC Department of Finance dataset with an assumed property build cost of $2,000 per m2 (taken from this report). It’s clear that the most significant contribution to total value is from the land.
How much did the government recoup?
The justification for channelling this amount of public money into new projects like the High Line is that the extra value it creates will be captured eventually by taxes. In New York, the main way of doing this is through property taxes. Yet In the case of the High Line, property taxes only captured a tiny amount of the value that the project directly contributed to.
If we solely look within 500m of the park their combined market value has gone up by $9.1bn between 2007–2018, yet if they’d gone up by the Manhattan mean, they would have only hit around $5.7bn. That means for properties within 500m of the High Line, it has contributed to $3.4bn of additional value, whilst property tax revenue has only gone up by $103m. That’s a big gap. $3.3bn to be exact. All of which is generated by public investment that’s escaped being paid back to the public purse.
To reiterate — the High Line cost $187m to build, it contributed to an additional uplift of $3.4bn for nearby properties, yet the government has only received $103m in additional property tax. The rest went to private landowners.
This begs the question as to what point the public should consider itself paid back, and at what social and economic cost should be deemed acceptable along the way. Viewed this way, the High Line is less a piece of public infrastructure, and more an infrastructure for privatising the public wealth.
Whilst it would be nice to think that the findings of this analysis of the High Line is an isolated incidence, you can find similar trends play out across almost all urban development. This is more or less the open secret of how we make cities. In fact in many cases it’s not even seen as a secret, it’s just de facto way the public sector makes development happen. Whilst the High Line provides an extreme example, it’s also one cities aren’t shy of copying.
But what if we didn’t invest in cities like this? What if instead, we start to invest in public infrastructure in a way that creates more equitable outcomes.
3. A Smart Covenant
An investment model for community-led urban development
If we agree that our cities need to become radically more sustainable, equitable and democratic — then their fabric needs to change. They’ll need to have green walkable streets; zero carbon transport; have homes close to high quality, well funded schools and hospitals; neighbourhoods that run on renewable energy; are resilient; culturally diverse, and encourage us to be socially inclusive and caring. To get there we’re going to need new models of investment and ownership to build them.
That means moving beyond the idea of trying to claw back money with duties, levies or taxes (although that will be necessary), and toward redesigning our regulatory systems so they don’t favour speculative financing and land trading.
What if instead, we could flip this model on its head and give communities a way of investing and owning the things that make neighbourhoods work, without the fear of being priced out by their desire to improve their community. This could involve local citizens from the start through local development groups or neighbourhood forums, so that rather than being steered by private developers and land speculators, its citizens that set the terms for what happens to the places around them. This could reframe how we think of increases in property prices, seeing it less as growth, but for what it really is — the collective wealth we all create.
How would it work?
Each time a new project was proposed, it could be broken up into small parcels that people could own and invest in — a bit like community shares or cooperative investment funds. This would give people a say in what they think their neighbourhoods need; from more green space, backing local businesses, or a shared solar energy grid. Residents could form local investment groups and vote for projects they want. If there’s enough support they could agree to fund them, forming a covenant between local property owners and the investment group.
Investments could be made in several different ways. For those who own property, a digital property deed could link the investment in a new project to equity in their home, allowing homeowners to exchange a portion of equity to cover the investment without creating huge amounts of paperwork or legal costs. This could only be realised and shared at the point of sale, or when the covenant runs out. Property values could be calculated on a quarterly or yearly basis, with homeowners voting on and sharing a part of their uplift (say 10%) to the communal fund in the form of equity. The covenant would come to an end once the original construction cost and lifetime maintenance costs have been covered, or they could be reinvested in new community projects.
For projects that are less likely to cause the land value to go up, but instead generate money or reduce costs (ie. installing a micro energy grid), community bonds could be issued. Those who contribute would get cheap or free renewable energy, as well as a share of the future revenue from excess energy sold back to the grid. This might sound like a long way off, but projects like this are already starting to happen?
What could this unlock?
Redesigning the nature of how we invest in this transition is vital to ensuring this is not a transition which concentrates wealth but is one that’s truly just and equitable.
The need for transition goes hand in hand with addressing the erosion of trust in top down, centralised government methods for making that happen (and create huge amounts of resistance when we try). We need to give people the control to decide what their future neighbourhoods can become. Time and time again we see that when people have a stake in how their neighbourhoods can change for the better, they are far more likely to help make it happen.
Whereas 10–15 years ago this type of system would have created a huge amount of bureaucracy, advances in technology now make these types of local, decentralised investment models feasible. HM Land Registry have recently trialed property and ownership transactions using smart contracts and blockchain. Applied in the right way, these type of new digital platforms could allow local infrastructure and assets to become collectively owned and relink the value they create to the neighbourhoods around them.
These new types of urban development wouldn’t just change who is able to invest in our cities, but could also change what we actually invest in. If we can link each house with a sort of digital passport, we could connect it with existing data about how our homes and our neighbourhoods actually work. So instead of us investing in parks, we could think about improving air quality and wellbeing by making use of new platforms that map and calculate the benefits of replacing road space with trees, electric transport, or local sustainable energy.
Writing our documents of ownership as code could allow us to do some interesting things. It could allow us to be much more fine grained about the transactions we make and how value can be created and circulated at a local level. It could allow the terms of those transactions to be rules based, or even based on the performance of the spaces around us — like the improvements to air quality, or reduced energy use.
Investing in Climate Transition
The transition our cities face to avoid climate catastrophe is something unprecedented in human history.
Let’s consider what lies ahead. If we are to stick to a temperature ceiling of 1.5 degrees it requires the fundamental transformation of our cities from how our architecture and urbanism transitions to a new climate, becoming resilient to more extreme weather events along with fundamentally decarbonising what we eat, what we wear, how we travel, and the very nature of how we will work and live. It means an urban fabric designed to create more social connection, not less.
This isn’t just a design question of what our cities look like. It’s an economic question about how we invest in them and who has the power to do so; how we invest in our shared transition, in our shared commons, shared liabilities, risk and opportunities shared infrastructures — with a hybridised — bottom up models, designed to combine specificity with the top down scale of resources necessary to make this a reality.
To explore the potential of this idea further we’ll be working to test how digital ledgers and smart contracts combine with property value data, and how this could rewrite the conventional property deed. We’re working towards creating a platform for localised investment in public infrastructure, and imagining a fairer and more democratic way for communities to invest and own parts of the neighbourhood around them.
Over the next few months we want to prototype and test the technical and legal feasibility of a smart commons covenant on the ground with amongst others CIVIC CAPITAL LAB, Climate KIC Urban Transformation team, The Civic Square / Impact Hub B’ham team, as well as the likely social and political implications it brings up (we welcome other instances to test this model — please do get in touch). We’re structuring this work around four things:
- Smart contract and digital property deed — a smart contract linked to a digital property deed, that can automatically distribute value uplift between two parties.
- Property valuation — an API that automatically accesses the existing NYC property value dataset, calculates value uplift above background inflation and links this data to a digital spatial model.
- Investment platform — developing the user experience for a neighbourhood investment platform for residents to collectively propose, vote for, and contribute funding towards local infrastructure projects
- A new democratic interface — for this to be socially legitimate we’re going to need to design new ways of local decision making and investment model.
We’re interested in working with experts in the fields of smart property contracting, land economics, mortgage and equity, and land and GIS data — so if you want to be involved or think you can help, we’d love to hear from you.
Smart Covenants is one of a number of experiments we’re working on across Dark Matter Labs. If you’re interesting in getting involved, or want to know more let us know @Radicle.