Imagine a world where developing countries are urbanising at crazy speeds, developed countries need to replace old infrastructure, all countries need new infrastructure to face climate change, and governments don’t have enough money to pay for all that. In fact, this is basically our world… but this is the easy bit.
Landing on a solution
A harder question is “where do we look for public money” — since it doesn’t grow on trees? This article’s title gives a clue: below them. But don’t worry, it’s not about cutting trees. We mean urban land, which is one of the most valuable forms of capital.
In 14 OECD countries for which data exists, land makes up roughly 35% of the total capital stock. Another 47% is buildings; the rest is mostly fancy machinery and equipment, raw materials and finished goods. Extrapolated for all 38 OECD countries, land is worth close to 130 trillion US dollars!
A smart policy instrument called “land-value capture” can make some of that value available for public investment. Put differently, land-value capture can help governments pay for expensive infrastructure and other public services without drawing from their general budget. Let us explain how.
Governments can initiate public actions that directly increase the value of land in a specific area. Think of public infrastructure investment. A city can tear down some ugly unused buildings and replace them with a park. It’s nicer to see trees outside your window rather than a concrete wall, so nearby land plots go up in value. The same goes for a new metro line or a new street. They improve accessibility, which makes close-by properties more valuable.
Another way governments (almost magically) trigger land-value increases is through changes in land-use regulations. For example, cities can allow for taller buildings in a specific area. This makes land more valuable because developers can add new floors to a building and sell more units.
You get the idea. All these things increase land value — and by a lot, as we’ll show in a moment.
Typically, those increases in wealth go directly in a few landowners’ pockets. That’s unfair because public decisions and taxpayers’ money are directly creating an unearned profit for a small number of people.
It’s like: “Dear landowner, thanks for owning land. The other citizens would like to pay for an improvement that will also increase your property’s value.” Not fair…
Most countries use some form of land value capture – but few countries use it well
A big boost to public finances
Public infrastructure investment and land-use changes generate a lot of money. The construction of a metro line in 2000 in Manila, the Philippines’ capital, directly increased the value of land within 1km of the line’s stations by nearly 3.4 billion US dollars. The line cost the city 655 million dollars to build.
The 2017 Q metro line extension in New York City generated 5.5 billion dollars in land value and cost 4.5 billion dollars. Just in case you didn’t catch that: the increases in property value were higher than what both projects cost! Those are not isolated cases, and land-use changes can trigger even bigger land value appreciations.
Beyond the fairness argument, in a time of tight budgets and big infrastructure needs, land value capture approaches allow governments to share in the wealth created by public action and reinvest it for the public good.
Land-value capture can also fund climate action. The park mentioned earlier sequesters CO2 emissions and reduces heatwaves. A metro line is a clean mobility system. Developers who get permission to build taller buildings could be asked to install solar panels on the roof and charging stations for electric cars. Anything that increases land values works.
Following Roman roads
Land-value capture is not a new idea. It’s been around for at least 2,000 years when the Roman Empire used it to fund new roads and aqueducts. Today, most countries use some form of land value capture. Cities like Bogotá, São Paulo, San Francisco, Frankfurt, Tokyo and others have raised millions, sometimes billions of dollars and funded major infrastructure projects through land-value capture. For example, São Paulo has earned billions by auctioning rights to build taller buildings.
However, few countries use land-value capture on a large scale and well. Local governments often lack awareness and technical capacity to implement it. It’s as if there is money lying on the ground and no one wants to pick it up. Sounds unusual, right?
If you want to know how your government could pick it up, check out the recently published OECD-Lincoln Institute of Land Policy Global Compendium of Land Value Capture Policies.