If housing supply stays constant and there is more demand for housing than available, then prioritization is necessary. Allocation priority is often assigned either by

• willingness to pay induced by a market economy,
• or first come, first serve induced by rent caps.

While “first come, first serve” might sound fair at first, not everyone starts looking at the same time, so it really prioritizes already established people, who bought property or found a flat in the past. For the few unoccupied flats, landlords will have many prospective tenants to choose from. Due to the price cap, tenants will mostly differ in the monetary risk they pose to landlords (besides personal biases). So they will tend to choose low risk tenants which come recommended (benefitting well connected clients) and tenants with good credit and income. This results in similar inequalities to a market economy. A well designed market economy (with high inheritance taxes) would probably come closer to a meritocracy than a system directly favouring the establishment.

Altruistic landlords

Both in a market economy as well as in the rent capped environment, some landlords might go against their personal interests and favour disadvantaged groups.

The difference in financial risk might represent a smaller monetary difference than entirely different rent sizes, so the incentive to act selfish might be smaller in the rent capped system. But over a long time horizon, selfish landlords will make more money and thus gain more properties. They therefore define the behavior of the system in the limit.

Ensuring sufficient supply

In either case prioritization is never desirable, so the most effective measure is to ensure sufficient supply by

1. building more housing inside the existing city (increasing density),
2. and expanding the city infrastructure, making a larger area reachable and therefore viable for living.

Since large cities are generally congested, transportation speed is limited by throughput and not maximal speed. Cars are really bad at throughput.

Cars also require parking spaces which reduce density. So the infrastructure which truly aids the expansion of living space is not streets but public transport.

Land value tax (LVT)

The property value $P$ consists of the value of the land $L$ and the value of the building on top $B$, i.e.

The value of the land is due to investments of the city, making land inside it valuable, while the value of the building is due to investments of the owner. Profit from land value increases are therefore due to positive externalities (not caused by the owner). The expenses of these value increases on the other hand (e.g. public infrastructure and parks) are paid by the city, but the city does not profit from them. The city can internalize the benefits of its investments with a tax on land value, removing labour- and investment-free profits from the owner and moving them to the city which caused them.

Most cities levy taxes on the property value $P$. This taxes both $L$ and $B$.

LVT is an incentive for density

For individuals a tax on $B$ disincentives investments into housing, as an empty or underdeveloped plot of land causes fewer taxes than a developed plot. Taxes on $L$ do the opposite, as they incentivize intensive use of an already tax-expensive plot of land, which causes those taxes no matter what is built on top.

If the LVT nullifies the net present value of $L$, it also removes incentive for speculation, as a property will no longer increase in value without investment.

LVT is an incentive for infrastructure

For cities a land value tax represents a return on its infrastructure investments.

Example: The Elisabeth Line in London caused a property value increase along its route. This rise in value is not due to investments of the owners, but due to the investment of the city. Capturing the return of this investment allows the city to fund repeated investments.

The size of the tax burden

LVTs are supposed to replace property taxes. Since we remove the tax on the value of the building $B$, an increase in the tax percentage of $L$ does not necessarily increase the tax burden (unless the plot was empty for example - but that is the point).

A conservative LVT would be a percentage, which does not change the tax burden on average.

To disincentivize speculation and internalize all benefits of public investments, a more progressive policy would be to set the total tax burden (net present value of all future discounted tax payments) equal to the land value. If tax income significantly surpasses property tax income, other types of distorting taxes (e.g. value added tax) could be reduced.

Assuming land value taxes $T$ and interest rate $r$ stay constant, this implies

The land value tax would therefore beI.e. the tax percentage is exactly equal to the interest rate $r$ (e.g. 7%). In reality interest rates, land values $L$ and therefore also taxes $T$ would fluctuate.

Determining Land Value

As land value is only observed when empty plots of land are sold, or a plot is sold with subsequent demolition of the old building, a geo-statistical model is needed to estimate the land value for all other plots of land. A LVT policy would ideally be written such that it always uses the best statistical model available. Where best could be qualified by prediction quality but also qualitative requirements such as publication in a peer reviewed journal and being explainable (to an expert – in contrast to black box methods).

To improve these statistical models collection of the following data would be helpful

• property transactions (i.e. measurements of $P$ which provides partial information about $L$)
• investments into buildings (which provide information about $B$).

It is intuitive, that information about $P$ and $B$ would help determining the remainder $L$. How sensitive this information is from a privacy perspective would warrant a public debate. At first glance, this data should not be problematic in an anonymized form.