Land is a city’s most valuable resource, but is liable to be badly misused. As cities grow, land risks becoming occupied without coordination or supporting infrastructure, while a few lucky landowners enjoy rising values created by the entire city. Active policy can change this.
Urban policymakers face decisions on land policy that will dramatically shape the future of cities. This brief examines how decisions over land tenure, planning, and taxation affect urban development.
Land use policy determines whether a city becomes an engine or an obstacle for national economic growth. Smart land use creates a platform on which firms and workers cluster together and individuals access basic services. Clustering makes workers much more productive: workers can specialise in a particular skill and form part of a larger-scale production process. But without active land policy, productive clusters are unable to form; instead land becomes occupied through an unplanned process of urban sprawl.
The more productive a city becomes, the more its land appreciates in value. But who captures this gain? The default option is that it gets captured by a few lucky individuals. In the 19th century, the Duke of Westminster became the richest man in Britain purely because he owned the land upon which the city of London developed. Smart public policy leads to a different outcome. In Hong Kong, public ownership and taxation of urban land meant that the government was able to recoup an estimated 80% of infrastructure investments between 1970 and 1991 (Hong, 1996). Public investment was able to finance itself through rising land values.
Land policy plays three crucial roles. By registering and recording ownership claims, it enables an active land market, a prerequisite for efficient land use. Through land use planning, it coordinates land use where the market is unable to. Either through taxation or public land ownership, it determines whether the appreciation of land value is captured by a few lucky individuals or by city governments for the public good.
- Urban land rights need to be not only secure, but also marketable and legally enforceable.
Marketable land rights prevent land use from becoming frozen in place. Legally enforceable rights enable land taxation and planning. Making land rights marketable and enforceable typically requires formalisation, but this comes with political and administrative challenges.
- Land policy is needed to coordinate firm investment and household settlement. The private sector cannot do this alone.
Without a credible plan for the future city, firms are unable to coordinate investments, whilst homes get built on land needed for vital infrastructure. Governments have three tools with which to coordinate land use: ‘master plans’, infrastructure, and regulation.
- The city authority has a clear ethical right to capture some of the land value appreciation created by urbanisation.
Land values increase during urbanisation as a result of surrounding public investments and population growth. City authorities deserve to capture this appreciation, through public land ownership or taxation of private ownership, for the collective good.