Worstall @ the Weekend El Reg treated us last weekend to the tale of the Buena Vista Mobile Home Park in Palo Alto, where the owner has a small ethical dilemma to deal with. The 4.5 acre site is apparently worth $55 million and the city council would like to buy it, but they've only got $39 million. The dilemma is that if he sells to the city council, then the people who live in the mobile homes get to stay there in affordable housing and if he sells at market value, then they all get turfed out and the new development will presumably be populated by stock rich techie types.
And my apologies here, but just about everyone involved in this story is just mad. Certifiably so. For it's not actually true that 4.5 acres of land in Palo Alto is worth $55 million, nor even $39 million. I do not say this because I am now denying my free market views. Rather, it's that the land just isn't worth that. What is worth that is that one is allowed to build on that 4.5 acres of land in Palo Alto. It's that which is worth all the moolah. And given that it's the good burghers of Palo Alto – through their city council – who decide on which pieces of land you can build on in that fair city, then they're fucking insane to be paying for something which they themselves created for free.
This all rather links in with much larger economic questions, obviously. The high price of housing in the South of England and London for example – where we don't in fact have a high price of housing at all. This is easily tested: go look at a home insurance policy. If your house were to spontaneously evaporate overnight (or, slightly more realistically, burn down, or a jumbo jet crashes on the roof or summat), then your insurance company has not pledged to pay you the market value of that habitation. Not at all: what's it's promised to pay you is the market value of the house but not the land. And most certainly not the market value of the planning permission to build a house on that plot of land.
And if anyone in London wants to go through this exercise they will see that a 3-bedroom house is insured for maybe £150k, not the £750k that it probably cost or could be sold for complete. It's the permission to build that is by far the largest part of the valuation of the whole package.
There's been another useful example of this a couple of years back too. Post WWII, all bombed-out housing was given planning permission as a way of preventing the bureaucracy from slowing down the rehousing of the nation. And a little sliver of land that had once comprised a terrace in South London got rather overlooked. The rubble was cleared away and it got incorporated into a local park, but the council didn't actually own it. A few years back some smart alecs realised this, bought it from the original owners and demanded that either the council let them build or that the council must buy them out.
The council offered them £15,000, not actually a bad valuation of a piece of a park in South London. The High Court, which decided the case, insisted that it should be £1.5 million, on the grounds that under the relevant legislation they a) owned the land and b) it had presumptive planning permission. And that's the difference in value between a piece of land in an urban centre that you are allowed to build upon and land that you are not allowed to build upon.
We can also go look at Piketty and his worries about ever-increasing wealth concentrations. One part of this is that the wealth-to-GDP ratio is increasing. That is, the accumulated wealth of the nation is becoming an ever-higher multiple of the year's GDP. He worries about this because it shows that society is becoming ever more bourgeois and inheritably so. I worry about it because it shows that society is becoming ever less efficient. For our wealth stock is, by definition, our capital, and GDP is the annual income that we gain from employing that capital. If we're getting less GDP from the same capital, or we've more capital producing the same GDP, then the society is becoming less efficient.
Within Piketty's work we can also see some of the reasons for this. One of which is the rise in the value of housing. It has (in both US and UK, although in the US it's largely restricted to the coasts) risen hugely since WWII. In fact, it's risen hugely since the Town and Country Planning Act of 1947. And for the reason given above: that was the first time that the issuance of planning permission was restricted. And the increase in value of housing hasn't been about the bricks and mortar going up in value: it's been about the value of the chitty that allows you to build on a piece of land going up. Because, obviously, this means an artificial restriction of quantity available.
Fun fact: more of Surrey is under golf courses than it is under housing. Think how much we could bring down the cost of Home Counties housing if we did something about that.
At which point, the silliness of what Palo Alto is seeking to do should become obvious.