Las personas que trabajan conmigo por lo general se sorprenden de hasta qué punto mi canon filosófico deriva de las películas no convencionales de bajo presupuesto, especialmente de la década de 1980. Cuando busco sabiduría, suelo recurrir a las enseñanzas de la película “Repo Man” (traducida al español como “Los recolectores”) o, en el caso de este ensayo, a la obra maestra alegórica de Terry Gilliam, “Time Bandits” (“Bandidos del tiempo”). En esta película, un grupo de trabajadores públicos son empleados por el Ser Supremo para rellenar los agujeros que quedaron en el continuo espacio-tiempo por el apresuramiento de haber creado el universo en siete días: “Verán, fue un trabajo algo chapucero”.

Igual que los bandidos del tiempo, los gestores de políticas generalmente tienen la tarea de rellenar agujeros: agujeros literales, como los baches de las calles, o agujeros más teóricos, que son los artefactos de los mercados privados disfuncionales. Uno de los grandes agujeros que la política ha tratado de rellenar durante décadas es la oferta inadecuada de viviendas sociales. Por ejemplo, los economistas especializados en vivienda de los Estados Unidos se han vuelto bastante expertos en hacer el seguimiento del tamaño de este agujero, que cada vez es más difícil de rellenar desde que el gobierno federal se comprometió a tratar el tema como una prioridad de política nacional a partir de la Ley de Vivienda de 1949, que fue parte de la legislación conocida como Fair Deal del expresidente Harry S. Truman.

Tal vez nuestro fracaso colectivo para resolver el déficit de viviendas sociales en los últimos 66 años tenga que ver con un análisis incorrecto del problema y con la conclusión de que pueden diseñarse soluciones basadas en el mercado con el fin de resolver la discordancia entre la oferta de viviendas sociales y la demanda de las mismas. En su discurso del Estado de la Unión de 1949, el presidente Truman resaltó que, para poder suplir las necesidades de millones de familias sin una vivienda adecuada, “la mayoría de las viviendas que necesitamos deberán ser construidas por el sector privado sin subsidios públicos”.

Para apoyar esta idea, me desviaré brevemente hacia la teoría del mercado. Partiendo del enfoque matemático para analizar la economía que predomina hoy en día, un mercado es, simplemente, un sistema de ecuaciones diferenciales parciales que se resuelve mediante un único precio. Las ecuaciones diferenciales parciales captan las decisiones complejas que toman los consumidores y los productores de bienes, y concilian los gustos, las preferencias y los presupuestos de los consumidores con las complejidades técnicas derivadas de producir un bien para así llegar a un precio que despeje el mercado mediante el acuerdo de todas las operaciones que los proveedores y consumidores de bienes están dispuestos a realizar.

Los prestigiosos economistas Arrow, Debreu y McKenzie demostraron la existencia teórica de un conjunto único de precios capaz de resolver simultáneamente la cuestión del “equilibrio general” de todos los mercados en una economía nacional o mundial. Un importante aspecto de esta contribución (que obtuvo el Premio Nobel) fue la observación de que un único precio despejaba cada mercado: un mercado, un precio. No se esperaba que un único precio mantuviera el equilibrio en dos mercados. Pero este es el defecto fundamental del mercado de la vivienda: en realidad, no es un mercado, sino dos. Los mercados de la vivienda proporcionan tanto lugares para vivir a los consumidores locales como bienes de inversión comercializables en todo el mundo, gracias a los grandes mercados de capital al servicio de los inversores a nivel mundial. Esta condición de mercado doble describía más al sector de viviendas ocupadas por sus propietarios; sin embargo, con la proliferación de los fideicomisos de inversión inmobiliaria (REIT, por su sigla en inglés), los mercados de alquiler se encuentran ahora en la misma situación.

Los mercados de bienes de consumo se comportan de manera muy diferente a los mercados de inversión, ya que responden a “reglas básicas” distintas. En lo que a la oferta se refiere, los precios de los bienes de consumo se derivan de los costos de producción, mientras que los precios de los mercados de inversión tienen que ver con los beneficios esperados. En relación con la demanda, factores tales como gustos y preferencias, ingresos de las familias y características demográficas determinan el precio de la vivienda como lugar donde residir. La demanda de vivienda con fines de inversión está relacionada con aspectos tales como la liquidez y las preferencias de liquidez de los inversores, las ganancias esperadas de inversiones alternativas, o las tasas de interés.

En los países desarrollados, los mercados de capitales mundiales y el mercado de la vivienda colisionan a nivel local, con pocas probabilidades de reconciliación. Los hogares a nivel local compiten con los inversores a nivel mundial para decidir el tipo y la cantidad de viviendas que se producen. En los mercados que atraen la inversión mundial se produce una gran cantidad de viviendas, aunque la falta de viviendas sociales es aguda y empeora con el paso del tiempo. Esto se debe a que una gran parte de las viviendas nuevas se produce para maximizar las ganancias de la inversión y no para suplir las necesidades de vivienda de la población local. Por ejemplo, no escasean los inversores mundiales dispuestos a participar en el desarrollo de apartamentos de US$100 millones en la Ciudad de Nueva York; sin embargo, escasean las viviendas sociales por la dificultad de conseguir fondos para desarrollarlas. En los mercados que han sido abandonados por el capital mundial, los precios de las viviendas caen por debajo de los costos de producción, por lo que existe un excedente de viviendas que se acumula y se deteriora. En casos extremos como el de Detroit, el orden del mercado sólo puede recuperarse mediante la demolición de miles de viviendas y edificios abandonados.

Tal vez sea este el momento de reconsiderar el análisis que llevó al presidente Truman (y a miles de gestores de políticas de vivienda después de él) a concluir que podemos forjar soluciones basadas en el mercado ante el desafío de proveer de vivienda a la población del país. Truman concluyó que “al producir pocas unidades de alquiler, frente a una proporción demasiado grande de viviendas de alto precio, la industria de la construcción se está excluyendo a sí misma rápidamente del mercado debido a los precios”. No obstante, Truman se refería al mercado de la vivienda para residir, no para invertir. Resulta importante destacar que la cantidad de unidades habitacionales en oferta en los países desarrollados como los Estados Unidos excede en mucho la cantidad de hogares. En el año 2010, el Censo de los EE.UU. calculó que en el país existían 131 millones de unidades habitacionales y 118 millones de hogares, y que una de cada siete unidades habitacionales se encontraba vacante. Resulta aún más impactante que, en los Estados Unidos, este excedente de la oferta de viviendas es una característica de todos los mercados metropolitanos del país, incluso de aquellos mercados metropolitanos con una escasez extrema de viviendas sociales. En 2010, el 8,5 por ciento de las unidades habitacionales se encontraban vacantes en el Gran Boston, un 9,1 por ciento en el área de la Bahía de San Francisco, y un 10,2 por ciento en Washington D.C. El problema radica en que muchas familias no tienen suficientes ingresos para acceder a las viviendas que están disponibles.

Al final, los bandidos del tiempo decidieron, en lugar de rellenar los agujeros que existían en el tejido de espacio y tiempo, aprovecharse de ellos para “hacerse indecentemente ricos”. Los bandidos querían capitalizar las imperfecciones celestiales de la misma manera que los inversores mundiales desean obtener rentabilidad de las dislocaciones del mercado a corto plazo. A fin de ilustrar los peligros de la especulación desmedida en los mercados no regulados, consideremos un relato apócrifo de un mercado muy diferente. En 1974 en Bangladesh, se sugirió que, debido a las copiosas lluvias que habían caído durante la temporada de siembra, era posible que existiera una escasez de arroz en la temporada de cosecha. Para anticiparse a dicha escasez, el precio del arroz comenzó a subir. Especuladores expertos en bienes comercializables se dieron cuenta de que obtendrían una buena rentabilidad del arroz que mantuvieran fuera de mercado. A pesar de que la cosecha real produjo abundante arroz, la interacción entre las expectativas del mercado y las manipulaciones del mercado por parte de los inversores en bienes comercializables generó una de las peores hambrunas del siglo XX, que causó aproximadamente un millón y medio de muertes relacionadas con el hambre. Esta hambruna no fue el resultado de una escasez real de alimentos. La colisión entre el mercado de bienes y el mercado de inversión especulativa causó tal aumento del precio del arroz que hizo que quedara fuera del alcance de las poblaciones locales, lo que dio como resultado que las familias sin tierras sufrieran una tasa de mortalidad tres veces más alta que las familias con tierras.

Tal vez la vivienda y el alimento sean aspectos demasiado importantes para ser administrados por los mercados no regulados. En vista de los daños que puede provocar el conflicto entre el mercado de bienes y el mercado de inversiones en las poblaciones locales, quizá las políticas públicas deberían concentrarse en proteger una parte del mercado —y del público— de los estragos de la especulación. En este número de la revista Land Lines, describimos algunas medidas incipientes para producir constantemente viviendas sociales, aislándolas de la especulación mediante fideicomisos de suelo comunitario, viviendas inclusivas y cooperativas de vivienda. Miriam Axel-Lute y Dana Hawkins-Simons examinan los mecanismos necesarios para organizar fideicomisos locales de suelo comunitario. Loren Berlin describe las medidas tomadas a fin de preservar la vivienda social en forma de viviendas prefabricadas y promover la accesibilidad permanente a dichas viviendas mediante la conversión de comunidades de viviendas prefabricadas en cooperativas de patrimonio limitado.

En artículos más admonitorios, Cynthia Goytia analiza las formas en que las comunidades de bajos ingresos en ciudades de toda América Latina eluden las regulaciones sobre vivienda que aumentan los costos de la misma, y producen sus propias viviendas accesibles pero por debajo de los estándares en asentamientos informales. Finalmente, el artículo de Li Sun y Zhi Liu trata de la precaria condición del 25 por ciento de los hogares urbanos en China que compraron viviendas sociales con derechos de propiedad inciertos en terrenos de propiedad colectiva ubicados en la periferia en rápido desarrollo de las ciudades y en “aldeas urbanas”, es decir, asentamientos que, anteriormente, eran rurales y en la actualidad están rodeados de construcciones modernas. A medida que los mercados de capital se intensifican en estos países, la rivalidad entre la vivienda como un bien de inversión y la vivienda como un lugar para vivir probablemente exacerbará la informalidad en las ciudades de América Latina y hará más precarios los derechos de propiedad de las familias chinas. Después de casi setenta años de medidas fallidas para lograr que los mercados privados suplan las necesidades de vivienda social de la población, tal vez sea el momento de desarrollar, y de exportar, otro enfoque que se fundamente en una comprensión más realista de la complejidad del mercado de la vivienda y del mercado del capital.

Conventional wisdom and basic economic principles would suggest that an area subject to higher commercial and industrial property taxes than its nearby neighbors will suffer reduced economic development in comparison to those neighbors. On the other hand, any effort to reduce such unequal or “classified” property tax rates will produce a revenue shortfall. Raising taxes on homeowners to equalize rates and recover this lost revenue will encounter enormous and obvious political resistance.

This is the situation currently facing Cook County and the city of Chicago, and was the subject of a conference led by Therese McGuire of the Institute of Government and Public Affairs (IGPA) at the University of Illinois at Chicago. Held last September and cosponsored by the Lincoln Institute, the IGPA, and the Civic Federation of Chicago, the program brought together more than a hundred business and civic leaders, academics and practitioners to consider alternative methods of addressing the problems presented by the Cook County classification system.

In Illinois, the use of a property tax classification system by Cook County has been blamed for the economic decline of Chicago and the inner suburbs. The classification system is also seen as a barrier to reforming school funding and the state’s tax system. Are these charges valid? Does the classification system put Cook County at an economic disadvantage compared to its rapidly growing adjacent “collar counties”? If classification has so many shortcomings, why was it instituted in the first place? If we are only now recognizing those shortcomings, what steps can be taken that are both economically and politically feasible to overcome the problems?

Overview of Tax Classification

Illinois has long operated under the twin principles of uniformity and universality for both real and personal property, and both principles were incorporated into the Illinois Constitution of 1870. However, de facto or administrative classification of real property developed in Cook County as a response to the difficulty in taxing personal property in the same manner as real property. By the 1920s, the Cook County assessor publicly acknowledged assessing residential property at 25 percent of real value and business property at 60 percent.

A 1966 Illinois Department of Revenue report noted that Cook County was using 15 different classification groups. Despite the fact that classification was clearly in violation of the 1870 Constitution, the Illinois Supreme Court had refused to confront the issue. By the late 1960s, however, the court was prepared to overturn the existing system, and the 1970 constitutional convention faced the potential threat of court intervention.

The convention was the product of numerous reform efforts in Illinois during the previous decade. The state had failed to find a compromise redistricting plan after the 1960 census, causing the entire Illinois House to be elected as at-large members in 1964. That election brought many reformers to office, and a House-created commission charged with recommending constitutional reforms subsequently called for the 1970 convention.

Several delegates on the convention’s revenue committee were passionately in favor of uniformity, and they had considerable support from experts who opposed classification as a matter of economic policy. On the other hand, the Chicago delegation was adamant in demanding that the new constitution legalize classification. It was generally believed that without legalization, the new constitution would not have the support of Chicago Mayor Richard J. Daley and his delegation, in which case it would fail to pass.

As a result, the 1970 Illinois Constitution allowed counties with a population greater than 200,000 to classify property for taxation. The extension of classification to these large counties was also allowed for the collar counties because many taxing districts crossed those county boundaries. Cook County’s system was thus guaranteed, but the Constitution gave the General Assembly the power to apply limitations because of concerns there would be a crazy quilt of classifications should the collar counties adopt that system. Nevertheless, no collar county has done so.

Today, Cook County’s classification system is considered by many to be an impediment to Illinois’ attempts to deal with a variety of social and economic issues. Politically, classification is believed to be partly to blame for the failure to reform education funding in Illinois. In 1997, then Governor James Edgar led an unsuccessful attempt to convince the General Assembly to gradually shift the burden of education funding from property taxes to income taxes. One of the strongest arguments against the effort was that it would be a windfall for businesses and corporations, whose property taxes would be shifted to individual taxpayers. That shift would have even been greater in Cook County, which has more than 47 percent of the state’s entire assessed value and where businesses pay property taxes at a rate double that of homeowners.

Impacts on Economic Development

In terms of economic development, some observers believe that classification puts Cook County at a disadvantage in the eyes of business people who might consider locating in Illinois or expanding their operations in the state. While there are obviously other factors involved, the concern is that classification would cause these companies to look more favorably at locations in the collar counties or other states.

Recent research has shown that high property taxes do have a negative effect on the market value of property and do deter businesses from locating in the affected areas. Studies of property tax differences in the Boston, Phoenix and Chicago areas have shown that, because higher property taxes mean higher rents and lower market values, real estate development shifts from the high-tax area to the low-tax area over time. Other studies have shown that manufacturers seeking to relocate are very sensitive to local property tax rates. New construction and retail trade are also affected negatively, although the service sector is not as influenced by high property taxes.

Is this the case in Cook County? A recent study by Richard Dye, Therese McGuire and David Merriman, all affiliated with the IGPA, found that the effective tax rate of Cook County (5.52 percent for commercial and 5.78 percent for industrial property) is higher than in the collar counties, which have an average rate of 2.54 percent on all property. Furthermore, they found that four measures of economic activity-growth in the value of commercial property, the value of industrial property, the number of establishments and the employment rate-were measurably lower in Cook County than in the collar counties. But is that the end of the story?

No, according to the study’s authors. A multifaceted national trend is dispersing population, employment and business activity away from metropolitan centers to outlying counties. To determine if it is this national trend or specific property tax differences that is causing slower economic growth in Cook County, the study examined the characteristics of 260 municipalities in the Chicago metropolitan area. The researchers used two samples of municipalities-one metro-wide and the other limited to those near the Cook County border, where the effects of higher tax rates should be most potent.

The researchers presented their results, at the conference finding, “weak evidence at best that taxes matter.” Once other influences on business activity were factored out, the researchers determined that, for the entire six-county region, employment was the only economic activity that seemed to be adversely affected by property taxes, although in the border region the market value of industrial property was also affected. “The bottom line is that the evidence is mixed and inconclusive,” said McGuire. “There is no smoking gun.”

Another participant in the conference challenged this interpretation of the results. Michael Wasylenko of Syracuse University, who had been asked to review the study in advance and discuss it at the conference, said he was convinced that the researchers did find significant effects because the employment measure is a better measure of economic activity than the others. “I think the weight of the evidence suggests that these results are consistent with previous findings that property tax differentials will have a substantial effect on employment growth within a metropolitan area.”

If the employment factor, then, is the one to be given the most weight and Cook County’s property tax classification system is economically disadvantageous, in addition to being a political roadblock to reform, what is to be done? “It comes down to whether the economic gains that might be realized if you went to a non-classified tax are worth the political battles. Are the economic development advantages enough to want to do this,” said Wasylenko.

The economic and political stakes in this decision are high, since Cook County currently levies more than 50 percent of all property taxes in the state. The county cannot rapidly shift a large part of the tax burden among classes of property, but neither can it ignore concerns that the tax burden on businesses located there place it at an economic disadvantage with regard to its nearby neighbors. Any solution must be approached as a component of the overall tax system, be grounded in verifiable data, and have significant support from the public, the media and business interests. The September conference sought to contribute to that process of informed public debate on a crucial fiscal topic.

In early December, the Cook County assessor proposed reducing the assessment ratio (the ratio of assessed value to market value) for certain types of business property: from 36 to 33 percent for industrial properties such as factories and distribution facilities; from 33 to 26 percent for large investor-owned residential property; and from 33 to 16 percent for multiuse storefront businesses with apartments on upper floors. The assessor’s hope is that more favorable treatment of business will lead to even more rapid growth of the tax base over time. While these recommendations came out of several different tax studies, any changes in assessment rates must by approved by the Cook County Board before they can be implemented.

Scott Koeneman is communications manager at the Institute of Government and Public Affairs (IGPA) of the University of Illinois in Urbana, Illinois.

References

Dye, R., T. McGuire and D. Merriam. 1999. “The Impact of Property Taxes and the Property Tax Classification on Business Activity in the Chicago Metropolitan Area.” Lincoln Institute of Land Policy Working Paper.

Giertz, J.F., and T. McGuire, “Cook County, Ill., Assessor Proposese Changes in Assessment Levels,” State Tax Today. Dec. 7, 1999.

Man, J. 1995. “The Incidence of Differential Commercial Property Taxes: Empirical Evidence,” National Tax Journal, 48: 479-496.

McDonald, J. 1993. “Incidence of the Property Tax on Commercial Real Estate: The Case of Downtown Chicago,” National Tax Journal, 46: 109-120.

Wheaton, W. 1984. “The Incidence of Inter-jurisdictional Differences in Commercial Property Taxes,” National Tax Journal, 37: 515-527.

Source: Illinois Department of Revenue

The interactions between land and property markets and the broader economy of cities and nations are central to the Lincoln Institute’s concerns. Two key objectives of our work in this area are (1) to raise awareness about the stakes of good land policy for creating well-functioning land and property markets and for improving the performance of financial markets, labor markets, the fiscal affairs of local and national governments, and ultimately the economic health of both cities and countries; and (2) to indicate the need for high quality data and an appropriate analytical framework to aid in understanding the importance of good land policy, monitoring the effects of land policies throughout the economy and facilitating policy reforms. In November 1997, the Lincoln Institute held a conference on the theme of “Land Prices, Information Systems, and the Market for Land Information” to explore these issues.

Land Values and Land Policy

How important are the stakes of good land policy? Hee-Nam Jung of the Korean Research Institute for Human Settlements reported on the importance of land markets in the economies of five countries (see Table 1). The value of land in mature economies such as Canada, France and the United States ranged from about one-third to three-quarters of GNP during the mid-1980s, and represented from 8 to 21 percent of estimated national wealth. In the more rapidly growing economies of Japan and Korea, land values were from three to six times as high as GNP in the 1980s, and represented half or more of estimated national wealth. In the mature economies these figures illustrate the importance of land as a source of wealth, but in rapidly growing economies land has an even more significant role in determining economic welfare and a host of incentives for the performance of the economy.

In Japan, for example, booming land and property values during the 1980s served as collateral to fund credit expansion throughout the economy and, indeed, throughout the world. Land prices in Japan’s six largest cities increased dramatically from 1980 to 1991, at a compound rate of about 12 percent annually (see Figure 1). By 1990, the estimated price of land being developed for residential purposes in Tokyo was estimated to be about $3,000 per square meter, compared to figures of roughly $110 in Toronto and Paris and $70 in Washington, D.C.

Between 1991 and 1996, however, Japanese land prices fell by nearly half, taking down the Japanese economy and a host of financial institutions in its wake. The cumulative losses of the Japanese banking system associated with the collapse of the property market and associated businesses are estimated around $1 trillion, making the U.S. Savings and Loan “crisis” seem comparatively insignificant. Analysis of Japanese land policy suggests some of the causes of the boom and bust cycle in land prices: policies that have severely restricted conversion of agricultural land to urban uses; an especially complex land development system that requires exceptionally long times for approvals; and a fiscal system that places little emphasis on the taxation of land and property values.

Land prices in Korea also rose at a tremendous rate during the 1980s-over 16 percent annually from 1981 to 1991. Remarkably, in most years nominal capital gains on Korean land were greater than Korea’s GNP. Jung explained that these gains had profound implications for the distribution of wealth and income in Korea, and for economic incentives. Not surprisingly, the recent collapse of Korean property markets has had tidal effects throughout the economy. As in the case of Japan, the Korean land policy framework has been seen as highly questionable. Government intervention in land and property markets over the years has been responsible for severely distorted markets that represent a major structural imbalance in the Korean economy.

Using Land Market Data for Policy Analysis

Other speakers at the conference presented information on the importance of land market performance for a variety of stakeholders throughout the economy: consumers and taxpayers; land developers and builders of residential and non-residential properties; banks and financial institutions; and both local and central governments. In the case of Cracow, Poland, Alain Bertaud from the World Bank indicated that policies embodied in master plans and zoning regulations were highly inconsistent with the nominal objectives of the regulations, and would lead to inefficient and costly spatial patterns within the city. His paper illustrated the value of having good data on land prices, regulations and the spatial distribution of the population in order to evaluate the effects of policies involving land use, infrastructure and property taxation.

Paul Cheshire from Oberlin College and Stephen Sheppard from the London School of Economics illustrated how data on land and housing prices, land and housing characteristics, and regulations can be used to evaluate the effects of government policies such as the preservation of urban open space. Jean-Paul Blandinieres of the French Ministry of Equipment, Transportation and Housing discussed an ambitious program of the French government to establish “Urban Observatories” to collect and analyze information on land and property markets and the effects of government policies.

Data Collection on Land and Property Markets

Recognition of the costs of land policy failures or, conversely, of the benefits associated with implementing good policies, has given rise to a number of systematic efforts to collect and analyze high quality data on land and property markets within various institutional settings. Pablo Trivelli discussed land and property information systems in Latin America that serve the needs of public and private stakeholders. Perhaps the most impressive of these is an effort in Brazil called EMBRAESP, which monitors key indicators of urban property market performance along with urban legislation, land regulations and major public works projects that might have an impact on the behavior of property markets. Data and analyses from EMBRAESP are of interest to many institutions throughout Brazil. The distribution of the information is self-sustaining through contracts with major newspaper chains, sales of periodic bulletins, disks containing standard data, and special reports responding to individual demands. Much of this information can also be accessed through the Internet.

Another major data collection and analysis effort was reported by David Dowall from the University of California-Berkeley. He developed the “Land Market Assessment,” a tool for analysis of land and housing markets that has been applied in over 30 developing countries and transitional economies. At comparatively modest cost, data are collected through aerial photos and satellite images, surveys of land brokers, and secondary sources on population, infrastructure and regulatory frameworks. Dowall’s analysis of the experience with these assessments documents a number of generic policy findings, especially concerning the costs of inappropriate land policies. His work also suggests that even more cost-effective versions of the tool can be developed that will illustrate the workings of land markets and beneficial policy reforms.

Romeo Sherko, David Stanfield and Malcolm Childress from the Land Tenure Center at the University of Wisconsin-Madison, addressed the issue of designing a strategy for the creation and dissemination of land information in transitional economies, where information has historically been tightly held, thus frustrating both the evolution of property markets and opportunities for policy analysis. Their conclusions regarding the role of the public and private sectors, the scope of data collection, and pricing and dissemination strategies help to explain why land market information is often not provided or is poorly provided by either the government or the private sector. On the other hand, their analysis suggests that the benefits of good land market information are considerable. Some of these benefits were illustrated by David Dale-Johnson from the University of Southern California and Jan Brzeski from Jagellonian University, Cracow, who discussed efforts to document rapidly evolving market prices of property in Cracow and to inform property tax reform efforts.

Samu Kurri, Seppo Laakso, and Heikki Loikkanen of the Finnish Government Institute of Economic Research discussed the land price information system in Finland, suggesting that it is only now beginning to catch up with the needs of many different potential users of the data. These users include those concerned with implementation of a new property tax and macro-economic and financial sector policymakers concerned with the interaction of the Finnish property market and national economic performance. Karl (Chip) Case of Wellesley College presented findings from a preliminary analysis of 100 years of land prices in Boston, which was designed, among other things, to highlight some of the methodological difficulties of measuring land prices in a way that facilitates policy analysis and reform.

Stephen K. Mayo is a senior fellow of the Lincoln Institute.

As a part of the educational activities of the Lincoln Institute’s Latin America Program, a course on “Large Urban Projects,” held in Cambridge last June, focused on the most important and challenging aspects of this land planning issue. Academics, public officials and representatives from private enterprises in 17 cities participated in the presentations and discussions. This article presents a synthesis of the principal points, questions and challenges raised in carrying out these complex projects.

Large urban redevelopment projects have become an important issue in many Latin American countries recently, due in part to changes motivated by the processes of globalization, deregulation and the introduction of new approaches in urban planning. These projects include varied types of interventions, but they are characterized primarily by their large size and scale, which challenge traditional instruments of urban management and financing.

Urban projects on a grand scale are not considered a novelty in Latin America. The diverse elements of existing developments include the revitalization of historic centers; conversion of abandoned industrial facilities, military areas, airports or train stations; large slum rehabilitation projects; and construction of innovative public transportation models. However, at least four important features characterize this new type of intervention:

• An urban management structure that implies the association of various public and private, national and international actors;
• Significant financing needs that require complex forms of interconnections among these actors;
• The conception and introduction of new urban processes that are intended to transform the city;
• The questioning of traditional urban planning perspectives, since these projects tend to exceed the scope of prevailing norms and policies.

The last feature is reinforced by the influence of different planning strategies and the impacts of large urban projects in various cities around the world (Powell 2000). One project that has influenced many city planners and officials in Latin America was the transformation of Barcelona in preparation for the Olympic Games in 1992 (Borja 1995). Several projects in Latin America have been inspired by, if not directly emulated, this approach (Carmona and Burgess 2001), but it also has faced serious criticism (Arantes, Vainer and Maricato 2000). It has been seen as a convenient process through which a group of decision makers or private interest stakeholders manage to bypass official planning and policy channels that are seen to be too dependent on the public (democratic) debate. As a result most such projects tend to be either elitist, because they displace low-income neighborhoods with gentrified and segregated upper-class land uses, or are socially exclusionary, because they develop single-class projects, either low-income settlements or high-income enclaves, in peripheral locations.

Large-scale projects raise new questions, make inherent contradictions more transparent, and challenge those responsible for urban land analysis and policy formulation. Of special importance are the new forms of management, regulation, financing and taxation that are required for or result from the execution of these projects, and in general the consequences for the functioning of land markets.

Size, Scale and Timeframe

The first issue that emerges from a discussion of large-scale projects has to do with the ambiguity of the term and the necessity of defining its validity. Size is a quantitative dimension, but scale suggests complex interrelations involving socioeconomic and political impacts. The wide variety of feelings evoked by large projects shows the limitations in being able to restore a vision of the urban whole and at the same time its global character (Ingallina 2001). This issue has just begun to be discussed in Latin America, and it is framed in the transition to a new approach in urban planning, which is related to the possibility and even the necessity of constructing a typology and indicators for its analysis. Issues such as the emblematic character of these projects, their role in stimulating other urban processes, the involvement of many actors, and the significance of the impacts on the life and development of the city are all part of the discussions. Nevertheless, it is the scale, understood as being more than just simple physical dimensions, that is the central core of this theme.

Since the scale of these projects is associated with complex urban processes that combine continuity and changes over the medium and long terms, the timeframe of their execution must be conceived accordingly. Many of the failures in the implementation of such projects have to do with the lack of a managing authority that would be free or protected from the political volatility of local administrations over time.

The cases of Puerto Madero in Buenos Aires and Fenix in Montevideo, the first completed and the second in process, offer examples of the difficulties in managing the scale and timing of development in the context of economic situations and policies that can change drastically. Twelve years after its construction, Puerto Madero has not yet stimulated other large-scale projects, such as the renovation of nearby Avenida de Mayo, nor appreciable transformations in urban norms.

The scale and timeframe are particularly important for the project in Montevideo, raising doubts about the feasibility of executing a project of this scale in relation to the character of the city, its economy, and other priorities and policies of the country. Its goal was to generate a “work of urban impact,” in this case promotion of public, private and mixed investments in a neighborhood that lost 18.4 percent of its population between 1985 and 1996, and focusing on an emblematic building, the old General Artigas train station. Most of this work has been executed, with a loan of $28 million from the Inter-American Development Bank, however the percentage of public and private investments are minimal and the Fenix project is having to compete with another large-scale corporate-commercial development located east of the city that is already attracting important firms and enterprises.

Land Policy Issues

The issue of scale relates intrinsically to the role of urban land, which makes one ask if land (including its value, uses, ownership and other factors) should be considered a key variable in the design and management of large-scale urban operations, since the feasibility and success of these projects are often associated with the internalization of formidable externalities often reflected in the cost and management of the land.

Projects to restore historic centers offer important lessons to be considered here. We can compare the cases of Old Havana, where land ownership is completely in the hands of the state, which has permitted certain activities to expand, and Lima, where land ownership is divided among many private owners and public sector agencies, adding to the difficulties in completing an ongoing restoration project. Even though Old Havana has received important financial cooperation from Europe and Lima has a $37 million loan from the Inter-American Development Bank, the main challenge is to promote private investment while also maintaining programs of social and economic assistance for the local residents. Both cities have created special units for the management of these projects, which constitutes an interesting commentary on institutional modernization.

The Role of the State

The scale, the time dimension and the role of land in large urban projects lead us to consider the role of the state and public investment. While urban operations on a large scale are not new in Latin American cities, their present conditions have been affected radically by economic changes, political crises and substantial modifications in the role of the state in general. These conditions make the execution of urban projects, as part of the process of long-term urban development, a source of contradictions with the generally short tenure of municipal governments and the limits of their territorial claims. We must also consider the differences in regulatory competencies between central governments and local municipalities, and the differences between public entities and private institutions or local community organizations, which often reflect conflicting interests due the decentralization and privatization processes being promoted simultaneously in many countries.

Two large projects related to transportation infrastructure are examples of local situations that led to very different results. One was the transformation of the old abandoned Cerrillos airport in Santiago, Chile, and the other was a project for a new airport for Mexico City in Texcoco, an area known as ejido land occupied by peasants and their descendants. In the first case, the active participation of interested groups is expanding the recuperation process of a zone of the city that does not have quality urban facilities. A total investment of $36 million from the public sector and $975 million from the private sector is supporting the construction of malls, facilities for education, health and recreation, and housing for the neighborhood. In Mexico serious conflicts between state interests and community rights to the land had caused social unrest and even the kidnapping of public officials. As a result, the federal government has recently withdrawn from the Texcoco project, assuming huge political and economic costs for this decision.

Segregation and Exclusion

Many planners and practitioners have doubts about the feasibility of large projects in poor countries and cities because of the distortions that their execution could cause on future development, in particular the reinforcing tendencies of segregation and social exclusiveness. The diminishing capacity of the state to look for new alternatives for financing socially beneficial projects through private capital, principally from international sources, adds to the doubts about their success. Many large-scale projects are seen as the only alternative or the unavoidable cost that the city or society has to pay to generate an attractive environment in a context of growing competition among cities for a limited number of external investors.

A key matter with respect to the use of public space generated by these projects is to avoid segregation of space and people. Special attention must be given to protect the inhabitants of the zones where the large urban projects are developed from the negative consequences of gentrification. This is without a doubt one of the most difficult aspects of large urban projects. Table 1 shows the most important aspects and the principal challenges that arise from an analysis of the large urban projects. Effectively, the integration of projects of this scope calls for a vision of the city that avoids the creation of islands of modernity isolated in the middle of poor areas, which would contribute to the process called the dualism of the city, or the generation of new exclusive urban centers.

Table 1: Aspects and Challenges of Large Urban Projects

Two cases in different political-economic contexts help us reflect about this matter. One is the El Recreo project, planned by Metrovivienda, in Bogotá. Although presenting innovative proposals about the use and management of the land in a large project for popular housing, the project has not been able to guarantee the integration of social groups with different income levels. In the Corredor Sur area of Panama City large zones are being planned for the construction of residences, but the result again serves primarily medium- and high-income sectors. Thus in both a decentralized and a centralized country the general norms that provoke residential segregation cannot seem to prevent negative consequences for the poorest sectors of society.

In view of all this, large urban projects should not be seen as an alternative approach to obsolete plans or rigid norms like zoning. They could instead be presented as a kind of intermediate-scale planning, as an integrated approach that addresses the needs of the whole city and avoids physical and social separations and the creation of norms that permit exclusive privileges. Only in this way can large-scale projects take their place as new instruments for urban planning. The positive effects of specific elements such as the quality of architecture and urban design are valuable in these projects if they operate as a benchmark and are distributed with equity throughout the city.

Public Benefits

Large-scale projects are public projects by the nature of their importance and impact, but that does not mean they are the total property of the state. Nevertheless, the complexity of the participant networks involved directly or indirectly, the variety of interests and the innumerable contradictions inherent in large projects require a leading management role by the public sector. The territorial scale of these operations especially depends on the support of the municipal governments, which in Latin America often lack the technical resources to manage such projects. Local support can guarantee a reduction of negative externalities and the involvement of weaker participants, generally local actors, through a more just distribution of the benefits, where the regulation of the use and taxation of the land is a key issue. Such is the intention of the Municipality of Santo Andre in Sao Paulo in the design of the extraordinarily complex Tamanduatehy project. It involves the reuse of an enormous tract of land previously occupied by railroad facilities and neighboring industrial plants that fled this once vigorous industrial belt of Sao Paulo to relocate in the hinterland. The project involves establishing a viable locus of new activities, mostly services and high-tech industries, capable of replacing the economic base of that region.

Beyond creating and marketing the image of the project, it is important to achieve social legitimacy through a combination of public and private partners engaged in joint ventures, the sale or renting of urban land, compensation for direct private investment, regulation, or even public recovery (or recapture) of costs and/or of unearned land value increments. Active public management is also necessary, since the development of the city implies common properties and benefits, not only economic interests. Analysis of economic and financial costs, and opportunity costs, are also important to avoid the failure of these projects.

Conclusions

The basic components in the pre-operational stage of executing large urban projects can be summarized as follows:

• Establish a development/management company independent from the state and municipal administration
• Formulate the comprehensive project plan
• Elaborate on the marketing plan
• Design the program of buildings and infrastructure
• Define adequate fiscal and regulatory instruments
• Formulate the financing plan (cash flow)
• Design a monitoring system

An adequate analysis of the trade-offs (economic, political, social, environmental, and others) is indispensable, even if it is clear that the complex problems of the contemporary city cannot be solved with large interventions alone. It is important to reiterate that more importance must be given to the institutionalization and legitimacy of the final plans and agreements than simply the application of legal norms.

The presentations and discussions at the course on “Large Urban Projects” show that the matter of urban land strongly underlies all the aspects and challenges described above. Land in this type of project presents a huge complexity and offers a great opportunity; the challenge is how to navigate between the interests and conflicts when there are many owners and stakeholders of the land. It is necessary to combat the temptation to believe that modern urban planning is the sum of large projects. Nevertheless, these projects can contribute to building a shared image of the city between the inhabitants and the users. This topic clearly has facets that have not been completely explored yet and that need continued collaborative analysis and by academics, policy makers and citizens.

Mario Lungo is executive director of the Office of Planning of the Metropolitan Area of San Salvador (OPAMSS) in El Salvador. He is also a professor and researcher at the Central American University José Simeón Cañas.

References

Borja, Jordi. 1995. Un modelo de transformación urbana. Quito, Peru: Programa de Gestion Urbana.

Carmona, Marisa and Rod Burgess. 2001. Strategic Planning and Urban Projects. Delft: Delft University Press.

Ingallina, Patrizia. 2001. Le Projet Urbain. Paris: Presses Universitaires de France.

Powell, Kenneth. 2000. La transformación de la ciudad. Barcelona: Ediciones Blume.

Arantes, Otilia, Carlos Vainer e Erminia Maricato. 2000. A cidade do pensamento unico. Petrópolis: Editora Vozes.

Property taxes based on market value have many features that recommend them as a source of local government revenue. They promote visibility and accountability in public spending by providing property owners with a means of evaluating the costs and benefits of local government services. They can provide stable, independent local revenue that is not at the mercy of state budget surpluses or deficits. They are now considered to be proportional or even mildly progressive, in contrast to earlier economic views that presumed the tax to be regressive.

Against these strengths, the greatest challenge to a value-based property tax is political: taxpayers’ strong and completely understandable resistance to sharp increases in tax payments that reflect rising markets but not necessarily rising incomes with which to pay the tax increases. The best known and most dramatic response to this situation was rejection of the value-based tax system in California in 1978. When voters approved Proposition 13, they changed the tax base to the value of the property at the time of purchase or construction, with a maximum 2 percent annual inflation adjustment. For property held by the same owner since 1978, the inflation adjustment is applied to its value on the 1975–1976 tax roll.

This change has greatly altered California’s fiscal landscape. It has restricted the role of local governments, centralized service provision and decision making, and redistributed the tax burden from long-time residents to new property owners. Local governments now have an incentive to seek sales tax revenue by encouraging large retail establishments, such as auto malls, in what has been termed the “fiscalization of land use.” Can the property tax achieve greater stability and predictability without such drastic social and governmental costs? Table 1 illustrates the wide range of residential property tax levies in large metropolitan areas, a factor that presents additional challenges to formulating uniform policies or practical recommendations.

A Lincoln Institute seminar in April 2005 brought together public finance and assessment officials, policy analysts and scholars to consider alternate approaches to the recurrent problems that volatile real estate markets pose for value-based property taxes.

Problems Related to Market-Value Assessment

Discussion began with the incontrovertible observation, “Taxpayers do not like unpredictability.” In theory, reductions in tax rates could balance increases in property prices to maintain stability in actual tax payments under market-value assessments. This approach faces two obstacles. The first and most straightforward is governmental reluctance to reduce tax rates and forego increased revenues when rising values provide a cover for greater tax collection. The second is nonuniform price appreciation in different locations and for different types of property. When one segment of the tax base experiences a disproportionate value change, a corresponding change in the tax rate applied to the entire property class will not maintain level tax collections. California faced both difficulties in the years preceding adoption of Proposition 13. There, rapid residential appreciation was not matched by the lagging commercial sector, and a $7.1 billion state surplus fueled taxpayer cynicism as to the actual need for increased government revenues.

While rapid market shifts are the most challenging source of unpredictable tax changes, taxpayer “shocks” can also be caused simply by long delays in reassessment. Maintaining outdated values on the tax rolls achieves short-term predictability in tax bills, but at the expense of uniformity, accuracy and even legality. Long-postponed reassessments have been followed by tax revolts in many jurisdictions, both in this country and overseas.

Options for Addressing Value Shifts

Seminar participants reviewed the benefits and drawbacks of various measures to address these problems.

Circuit breakers, as their name implies, attempt to reduce a property tax “overload” by providing a refund or credit for taxes that exceed a set percentage of the property owner’s income. When funded by the state and administered as part of the state tax system, they have the dual benefit of protecting local revenue and targeting aid to the most needy taxpayers. At the same time, they require state funding and administration, and taxpayers must file tax returns to order to obtain these benefits. Like all programs that require income information, they sometimes encounter taxpayer resistance and consequent underutilization.

Homestead exemptions, available in most states, reduce assessments on the taxpayer’s primary residence. These exemptions are often granted without regard to taxpayer income, and so are not targeted to the most needy. In predominantly residential communities, this results in a significant loss of municipal revenues unless the tax rate is increased or the tax burden is shifted to other taxpayers. Like all preferential programs for homeowners, these exemptions fail to benefit renters, who bear a portion of the property tax burden and generally are less affluent than homeowners.

Tax deferral measures, often available to low-income elderly homeowners, permit unpaid taxes to accumulate as a lien against the property, to be paid after the residence changes hands. However, the desire to retain property clear of encumbrances has traditionally led homeowners to avoid making use of this option.

“Truth in taxation” legislation requires local governments to take various measures, such as publishing voter information and requesting ballot approval, to treat increases in tax collections in the same manner whether they are the result of growth in the tax base or increases in the tax rate. These enactments seek to counter the temptation to allow rates to remain constant while market values rise, thus increasing taxes and spending without budgetary accountability.

Limitations on annual total property tax collection increases, such as Proposition 2½ in Massachusetts, restrict overall levy growth but do not address unpredictable tax bill changes for specific taxpayers. For example, after several decades of tax stability, Boston taxpayers are now facing assessment shifts that reflect a downturn in the commercial property market with simultaneous explosive growth in certain residential values.

Limitations on annual tax increases for individual properties have enormous political appeal, but face three hazards. First, there is often pressure to make the phase-in period as long as possible, or even longer than possible. Montana provided for an extended 50-year phase-in of new assessments. Second, initial success at limiting increases to a certain percentage may lead to efforts to reduce that limit again. Oklahoma instituted a 5 percent limit and now faces pressure to reduce it to 3 percent. Finally, the “catch-up” of tax assessments when values stabilize or even drop elicits opposition of its own as taxpayers face increasing assessments while property values are flat or falling.

Assessment “freezes” take limitations on increases to their ultimate conclusion, prohibiting any increases despite changes in market values. They often are restricted to specific groups of taxpayers, such as elderly homeowners. Proposition 13 is a type of assessment freeze for all property, with only a 2 percent annual inflation adjustment in the tax base. These measures are in many respects equivalent to the long delays in reassessments that lead to nonuniformity and resistance to new valuations. After values are frozen taxpayers may seek to transfer that value to other family members, as they do in California, or to new residences, as in Texas.

Possible New Approaches

Seminar participants discussed methods for utilizing these and other measures to address the problems of unpredictability while minimizing the problems of inequitable distribution of the tax burden and maintenance of collections. A major distinction was drawn between approaches that moderate tax bill shifts but maintain a market-value base and those that alter assessments themselves. Altering assessments by limiting increases in value can result in situations where owners of similar properties pay very different tax bills. Furthermore, over time properties with average or lesser value appreciation can experience an increasingly greater share of taxes compared with properties that have had larger market increases. As a result wealthier taxpayers are more likely than those of moderate or low incomes to benefit from assessment limits.

To maintain a market-value tax base, with its benefits of uniformity, understandability and administrative efficiency, participants offered suggestions to stabilize rapid increases in tax payments due to significant shifts in the assessment base.

• Eliminating stringent income limitations on eligibility for senior citizen deferral programs, expanding eligibility for circuit breakers and tax deferral, and including such measures in state rather than local tax relief programs would allow more taxpayers to participate. A state could establish a property tax deferral fund to reimburse local jurisdictions for delayed collections.
• Classification and taxation of property according to use is a common means of taxing commercial and industrial properties at a higher rate than residential properties. Changing the class rates to accommodate a shift in the value base can be an appropriate short-term remedy, but may have harmful economic consequences in the long term. In Massachusetts the permitted shift of the share of the total tax levy from residential to commercial property in a municipality is subject to statutory limits. The recent combined acceleration of residential values and downturn of commercial values would have resulted in a substantial shift of taxes to homeowners in the City of Boston and a few other urban centers. Thus the legislature permitted a temporary increase of the share to be borne by the commercial class, at local option, but required a return to an even more limited class share difference within a five-year period.
• Alternative methods of tax collection, such as credit card, direct debit or more frequent payment schedules, may offer greater financial convenience than the more common annual and semiannual billings.
• Shorter periods between revaluations avoid the “sticker shock” that accompanies dramatic shifts and increases in value when reassessment occurs infrequently. Annual reassessments using computer-assisted mass appraisals offer greater stability and uniformity. Tax bills that reflect current values, rather than fractional assessments or outdated figures, are easier for taxpayers to understand.

Even significant increases in assessed value, if relatively uniform across the jurisdiction, do not result in increased taxes for most property owners if the municipal budget requires no additional property tax revenues and the tax rate is reduced proportionately. Better information about the relationship between assessed value and the tax rate will make it less likely that taxpayers will place the blame for their higher taxes on the assessors and their assessments. They may consider instead the adequacy of funding sources available to local governments, the effect of exemptions that reduce the property tax base, and unfunded mandates that require additional local expenditures.

The property tax, as the most important source of autonomous local revenue, often bears the brunt of criticism for the social, economic and fiscal pressures on local communities. Among these pressures are increased costs of new educational, environmental and security requirements, reductions in state and federal assistance, changing demographics and economic conditions, and increasing numbers of exemptions. Attention to these issues can clarify the debate over the role and burden of property taxes and the effectiveness of various tax relief measures.

Improving Educational Resources

There is an urgent need to provide government officials, lawmakers and the public with better information on property tax policy choices. Tax revolts and anti-tax initiatives make compelling news stories, but they should be balanced by concise and accessible information that sheds light on the problem and its solution. There is also a need for periodic research on such topics as:

• The effects over time of assessment and tax limits on the distribution of the property tax burden and on revenue growth, and the full costs to residents of additional fees and charges imposed to offset decreases in local property tax revenues.
• The effectiveness of property tax relief measures, and the distribution of their benefits across taxpayer classes.
• “Tax expenditure” studies to quantify the cost of exemptions, and exploration of the use of payments in lieu of taxes (PILOTS) for tax-exempt nonprofit property owners to pay for municipal services received.
• Assessment quality studies to evaluate both individual assessment equity and the distribution of the tax burden.

The Institute will be collaborating with the seminar participants and others in continuing these discussions and will undertake further research and the preparation of publications on these property tax issues in the coming year.

Joan Youngman is senior fellow at the Lincoln Institute of Land Policy, where she chairs the Department of Valuation and Taxation. Her writings include Legal Issues in Property Valuation and Taxation (1994), and two books co-edited with Jane Malme, An International Survey of Taxes on Land and Buildings (1994) and The Development of Property Taxation in Economies in Transition (2001). She is a contributing author on the property taxation chapter of Jerome R. Hellerstein and Walter Hellerstein’s State and Local Taxation (7th ed. 2001), and writes on property taxation for State Tax Notes.

Jane Malme, fellow of the Lincoln Institute, is an attorney, author and consultant on property tax policy, law and administration in the U.S. and internationally. She directed the Massachusetts Department of Revenue’s Bureau of Local Assessment as it implemented major property tax reforms from 1978 to 1990.

The Lincoln Institute seminar on Property Taxes and Market Values—Responding to Post-Proposition 13 Challenges in April 2005 included participants from many states, including California, Illinois, Maine, Massachusetts, Michigan, Minnesota, New Hampshire, New York and Oklahoma. The discussion leader was Alan Dornfest, property tax policy supervisor in the Idaho State Tax Commission.

The Institute will continue this discussion at the International Association of Assessing Officers (IAAO) Annual Conference in Anchorage, Alaska, in September. Jane Malme will moderate a policy seminar on Property Tax Viability in Volatile Markets with speakers Alan Dornfest; Mark Haveman, director of development for the Minnesota Taxpayers Association and project director for its Center for Public Finance Research; and Andrew Reschovsky, professor of public affairs at the University of Wisconsin’s LaFollette School of Public Affairs.

Ciro Biderman is an associate professor in the graduate and undergraduate programs in public administration and in economics at Getulio Vargas Foundation (FGV) in São Paulo; associate researcher at the Center for the Study of the Politics and Economics of the Public Sector (CEPESP/FGV); and associate researcher at the Metropolis Laboratory of Urbanism at São Paulo State University (LUME/FAUUSP). He received his Ph.D. in economics at the FGV and his postdoctoral degree in urban economics at the Massachusetts Institute of Technology in 2007.

Biderman was a visiting fellow at the Lincoln Institute of Land Policy from 2006 to 2009, and he continues to teach courses and conduct research with Martim Smolka and others affiliated with the Program on Latin America and the Caribbean. He also consults on the economics and politics of local development for the World Bank and other organizations. His research interests include urban and regional economics focused on public policies at the subnational level, with particular emphasis on land policy interactions with real estate markets and transport costs.

He has published articles in academic journals, and coauthored or coedited three books, including the 2005 volume Economia do Setor Público no Brasil (Public Sector Economics in Brazil). At the Lincoln Institute he has written several Land Lines articles and working papers, all of which are available on the Institute Web site.

Land Lines: As a Latin American scholar specializing in land economics issues, how do you compare the state of the art of research in the region to other countries?

Ciro Biderman: In Brazil, as in most of Latin America, there is a lack of research in urban economics in general and in land issues in particular. The same is true to some extent in the United States and Europe, although the research interests are quite different, and urban economics is more in the mainstream in those countries.

Some relevant characteristics of cities in Latin America are similar to those in other developing countries, and all would benefit from additional research. For instance, despite the large informal market in Latin America, most economists have neglected that sector. Ironically, most urban economics analysis of informality has been conducted by U.S. and other international scholars.

Second, Latin American cities are usually not as sprawling as cities elsewhere, yet their historic downtowns are often deteriorated and we know little about why this is happening. Third, most countries in the region have recently adopted decentralization policies that shifted the responsibility for the provision of public goods to local governments. However, the revenues of local governments are low and most rely heavily on federal transfers.

Land Lines: How did you become associated with the Lincoln Institute of Land Policy?

Ciro Biderman: My first contact was in 1998, when I was awarded a dissertation fellowship to finish my Ph.D. Working with Paulo Sandroni at FGV, I studied the impact on land prices of a zoning change in São Paulo. At the time, the central business district was expanding toward the southwest, but the expansion was blocked by Jardim Europa, then a low-density, high-end residential neighborhood. New office development bypassed the area, moving towards the new Luiz Carlos Berrini Avenue. To reverse this pattern, in 1996 the city changed the zoning in part of Jardim Europa, increasing density and auctioning building rights to encourage new development.

I compared the part of the neighborhood where zoning did not change with that which experienced exogenous changes from being a low-rise residential area to a high-rise, mixed-use area of high-end residential and office space. In an article written with Sandroni and Smolka (2006) we showed that the change in density increased land prices as expected.

The most interesting finding, however, was the local government’s capture of the land price increment through a fiscal mechanism called CEPAC (Certificate of Additional Potential of Construction). These certificates are auctioned as part of the process by which developers obtain building licenses in specified areas. In the adjacent neighborhood where business development had leapfrogged without CEPACs, the incremental land rent generated by the zoning change was instead captured by the developers.

Land Lines: What other research have you pursued at the Institute?

Ciro Biderman: Since becoming a visiting fellow in 2006, I have focused on the economics of informal housing, particularly on the extent to which urban regulation was statistically associated with different measures of informality, including the role of regulation on prices in formal and informal housing markets (Biderman 2008).

In a related study in 2009, Martim Smolka and I discussed the policy implications of how and why different international agencies define informality to reflect one or more housing attributes. The consequence is that different definitions produce different estimates of the incidence of informality. Thus, when governments improve only one informal housing attribute but not the others, they may report a reduction in informality when in fact there is none.

In a new line of research I am looking at the causes and consequences of sprawl in Latin America, focusing on ten large Brazilian cities. Preliminary findings show that these cities are less sprawled than their North American and European counterparts, but more than comparable Asian cities. Transport systems are based on the automobile, as in the United States, except that less than 10 percent of the population owns a car. Yet the socioeconomic spatial pattern is more similar to Europe, with the rich living in the center and the poor on the periphery.

Land Lines: You help the Latin America Program evaluate research proposals submitted for Institute funding. What have you learned from that experience?

Ciro Biderman: I have been involved in evaluating these proposals since 2006, and the number of high-quality scholarly applications has grown steadily. I have noticed that the research questions from Latin Americans scholars are often better presented than the techniques to address them, in contrast to what occurs in the United States.

I think this is a problem faced in many aspects of social science research, and not only in Latin America. Although the origins of urban economics were grounded in the connections among urban equilibrium, transport costs, and land prices, each of these fields has developed almost independently and there is a general need for more integrated analysis.

Land Lines: What do you see as the main strengths of Latin American researchers?

Ciro Biderman: Highly qualified professionals in Brazil and other countries often move between public office and academia. As a result, they are aware of the respective issues and needs in the public sector and academia, and may have a more direct impact on the implementation of urban policies.

Furthermore, researchers can bring to focus what is specific to Latin American cities compared to cities elsewhere, thus expanding the scope of applied research. For example, to the best of my knowledge, there is no economic model for housing demand that allows the quality of the housing to change in order to adjust housing consumption to budget constraints. This is quite a relevant question in Latin America, but not to researchers in the United States or Europe.

Land Lines: Can you elaborate on the kinds of issues facing scholars in different world regions?

Ciro Biderman: As with most social phenomena, patterns of land use have evolved historically. For instance, sprawl in the United States is closely related to the movement of high-income groups to the periphery of metropolitan areas. In Latin America the movement of income groups is usually in the opposite direction, with poor people seeking affordable land on the periphery.

Although fundamental principles of urban economic theory might apply, the consequences are quite different. Studying different patterns using the same theoretical framework would advance our understanding of urban economics.

Land Lines: What topics or issues are especially lacking in strong empirical work?

Ciro Biderman: In terms of land policy, in my opinion, we need more research on property taxation; the interactions of fiscal and regulatory policies with land use planning issues; socioeconomic patterns of sprawl; and the connections between land use and transport. The lack of research on the economics of the informal housing market is surprising since informal settlements represent more than one-third of the total urban housing stock in some countries. Although this problem could eventually be solved with subsidies, the amount of resources needed is probably prohibitive for most countries.

Currently there is a branch of the literature studying the impact of tenure security on general welfare, suggesting that titling programs may be improving welfare, but there are few similar studies on the impacts of slum upgrading programs. While some evidence suggests that inappropriate regulation may induce more informality, we do not yet fully understand the economic nexus between formal and informal housing markets. We also lack systematic cross-country studies.

Land Lines: Do you think there a trade-off between policy experience and technical research capability?

Ciro Biderman: As an economist, I know the virtues of the division of labor and gains from trade, so it is important that academics and public officials complement each other. Thus, researchers need to be as rigorous as possible and able to expose the unintended consequences of public policies, and policy makers must ensure that their policies are designed so they can be implemented effectively and efficiently to reach the intended goals.

For example, a major policy issue is how to increase the supply of affordable, high-quality housing for the poor in developing countries, which requires understanding the opportunity costs between affordability and quality. The trade-offs may be technical, but the alternatives are clearly political. How can this housing imbalance be fixed? Who has to pay the cost (the residents or the society)? What are the consequences of different policy options? These are practical questions. Empirical evidence that helps to evaluate current policies might be a major resource for a policy maker.

Land Lines: How do you think the Lincoln Institute can contribute to narrowing the gap between rigorous empirical research and policy relevance?

Ciro Biderman: I believe that the Institute is already doing that by working with both scholars and policy makers in a variety of programs and fellowship opportunities. Classroom and online courses offer training to policy makers to help improve their dialogue with researchers, and to young scholars to expand the pool of policy-sensitive researchers. The intensive courses in methods for land policy analysis also inform researchers about advances in urban economics theory and strengthen both their methodological skills and their knowledge of new analytical techniques.

References

Biderman, Ciro. 2008. Informality in Brazil. Does urban land use and building regulation matter? Working Paper. Cambridge, MA: Lincoln Institute of Land Policy.

Biderman, Ciro, Paulo Sandroni, and Martim Smolka. 2006. Large-scale urban interventions: The case of Faria Lima in São Paulo. Land Lines 18(2).

Smolka, Martim, and Ciro Biderman. 2009. Measuring informality in housing settlements: Why bother? Land Lines 21(2).

China ha experimentado un crecimiento económico rápido desde 1978, cuando adoptó una reforma económica y políticas de apertura hacia el mundo. Se ha convertido en la segunda mayor economía del mundo en términos de PIB, y su recaudación tributaria ha experimentado un crecimiento anual promedio de alrededor del 20 por ciento desde la reforma fiscal de 1994.

No obstante, muchos gobiernos subnacionales de China han experimentado problemas fiscales y han incurrido en grandes deudas locales en los últimos años debido a numerosas competencias del gobierno central no financiadas y la gran brecha fiscal entre las necesidades de gasto y la capacidad para generar ingresos. Por ejemplo, en 2008, los gobiernos subnacionales de China han sido responsables por el 79 por ciento de los gastos totales del gobierno, pero sólo del 47 por ciento de los ingresos gubernamentales totales (Man 2011).

A diferencia de muchos países desarrollados, los gobiernos locales de China (provinciales, de prefectura, de condado y municipales) no tienen ninguna autoridad legal para imponer tributos o pedir préstamos, y el impuesto sobre la propiedad desempeña un papel muy limitado en la estructura de financiamiento público a nivel local. En consecuencia, muchos gobiernos locales recurren a fuentes de ingresos extrapresupuestarios, imponen aranceles para el derecho a arrendar el suelo, otras tasas y recargos, y obtienen préstamos bancarios de forma indirecta para financiar las inversiones de infraestructura y desarrollo económico local.

Durante el período de 1991 a 2008, los aranceles para el arriendo del suelo (también llamados aranceles de transferencia del suelo) aumentaron del 5,7 por ciento de los ingresos totales del presupuesto local al 43,5 por ciento. Esta dependencia excesiva de aranceles para el arriendo del suelo ha sido criticada como un factor importante en el crecimiento del precio de las viviendas y el aumento de casos de corrupción y disputas sobre suelos en China.

Problemas con el sistema tributario actual

El sistema actual de impuestos sobre el suelo y la propiedad en China genera una cantidad limitada de ingresos, aun cuando se gravan cinco tipos de impuestos sobre la propiedad inmobiliaria en las diversas etapas de producción (ver tabla 1). Los gobiernos locales cobran el Impuesto a la Ocupación de Suelos Agrícolas y el Impuesto al Valor Agregado al Suelo (IVAS) en el momento de adquirir y transferir el suelo. En el momento de la toma de posesión, se cobran el Impuesto al Uso Urbano del Suelo y el Impuesto sobre la Propiedad Inmobiliaria, y finalmente se cobra el Impuesto a la Escritura cuando se transfiere el título de la propiedad.

Este sistema tributario tiene muchos problemas y debe ser reformado estructuralmente. En primer lugar, los diversos impuestos sobre el suelo y la propiedad constituyen solamente un 15,7 por ciento de los ingresos tributarios a nivel local. Es una fuente de ingresos inestable e inadecuada para los gobiernos locales de China. Los funcionarios de los gobiernos locales han dependido de otras fuentes de ingresos, como el arriendo de suelos del estado a emprendedores inmobiliarios a cambio de un arancel fijo importante, para financiar proyectos de capital y desarrollo de infraestructura. En 2010, los gobiernos locales de China recaudaron 2,7 billones de RMB en concepto de aranceles de arriendo de suelos, además de 8,3 billones de RMB en impuestos y otros ingresos presupuestarios. La relación entre los aranceles de arriendo y los ingresos tributarios totales fue del 32,5 por ciento, comparada con el 4,5 por ciento en 1999.

En segundo lugar, la estructura actual de impuestos sobre la propiedad en China aplica una mayor carga tributaria en la etapa de transacción que durante la posesión. Por ejemplo, la recaudación del impuesto anual sobre el uso urbano del suelo y el impuesto sobre la propiedad inmobiliaria durante la etapa de posesión ascendió a sólo el 6,44 por ciento de los ingresos tributarios locales en 2008, mientras que alrededor del 9,25 por ciento de los ingresos tributarios locales se recaudó en las etapas del desarrollo del suelo y transacción de la propiedad.

En tercer lugar, las propiedades residenciales ocupadas por sus dueños no están incluidas actualmente en la base tributaria del impuesto sobre la propiedad inmobiliaria, lo que restringe la capacidad del gobierno para recuperar la plusvalía del mercado de vivienda en pleno auge debido a la privatización de viviendas de interés social, el crecimiento de los ingresos de la población y la inversión masiva en infraestructura urbana. Para 2010, la tasa de propiedad de viviendas alcanzó el 84,3 por ciento de la bolsa de viviendas urbanas del mercado formal, y los valores de las mismas han experimentado aumentos sustanciales en los últimos cinco años en muchas de las grandes ciudades (Man, Zheng y Ren, 2011). Pero la exclusión de las propiedades residenciales del impuesto sobre la propiedad inmueble creó desniveles de riqueza y una demanda excesiva de viviendas con fines de inversión y especulación, lo que aumentó la cantidad de viviendas vacantes en muchas ciudades costeras.

Finalmente, a diferencia del sistema de impuestos sobre la propiedad en muchos países desarrollados, en China no se grava el impuesto de acuerdo al avalúo de la propiedad. En lugar de ello, su valor es el 1,2 por ciento del precio original, menos un 10 al 30 por ciento por depreciación, o un 15 por ciento de los ingresos reales por arriendo de la propiedad. Los funcionarios gubernamentales tienen poca experiencia en la estimación del valor de mercado de las propiedades existentes, una destreza fundamental para poder establecer un sistema moderno de impuesto sobre la propiedad.

Recientes avances en la reforma del impuesto sobre la propiedad

El gobierno central de China ha estado explorando la posibilidad de reformar su sistema actual de tributos sobre el suelo y la propiedad desde 2003, cuando propuso oficialmente por primera vez el establecimiento de un sistema moderno de impuestos sobre la propiedad. En 2006 se seleccionaron seis ciudades para realizar proyectos pilotos, y un año después se amplió esta cantidad a 10 ciudades.

En 2010, la Administración Estatal de Impuestos (AEI), que está a cargo de este proyecto piloto, ordenó a cada provincia que seleccionara por lo menos una ciudad para realizar ensayos de avalúo de propiedades, con el objeto de verificar el precio de venta declarado por los propietarios para el impuesto a la escritura. Estos ensayos han tenido un importante papel en la preparación técnica e informática de avalúos masivos futuros del valor de la propiedad. El 28 de enero de 2011, las ciudades de Shanghái y Chongqing recibieron permiso para recaudar impuestos sobre la propiedad de segundas residencias y residencias de lujo de reciente adquisición, respectivamente.

Logros importantes

La reforma del sistema de impuestos sobre la propiedad en China intenta establecer un sistema para gravar las propiedades existentes (incluyendo tanto el suelo como las estructuras edificadas) anualmente de acuerdo a su avalúo, con el objeto de generar una fuente significativa de ingresos para los gobiernos locales. Este sistema utilizará varios métodos de avalúo, tales como la comparación con los valores de mercado, su costo y los ingresos generados, y se aplicará a propiedades comerciales e industriales, así como también a propiedades residenciales, incluyendo aquellas ocupadas por sus dueños.

Algunas ciudades piloto, como Hangzhou, Dandong y Chongqing, han estudiado e implementado distintas versiones de Avalúo Masivo Asistido por Computadora (CAMA, por sus siglas en inglés). El AEI ha estado capacitando a funcionarios de las agencias tributarias locales de cada provincia en el desarrollo de un sistema CAMA y sus aplicaciones. También ha intentado establecer normas tecnológicas para cada método de avalúo.

En 2005, el AEI diseñó un ensayo de regulación de avalúo de propiedades inmobiliarias, con 12 capítulos y 40 cláusulas que estipulan los métodos de recolección de datos, las normas y el sistema CAMA. Todas las ciudades piloto han concluido su simulación de avalúo y han calculado las cargas y los ingresos tributarios utilizando distintos escenarios de tasa de impuestos. En 2011 se seleccionó a, por lo menos, una ciudad de cada provincia para realizar un avalúo de propiedades recién adquiridas para recaudar el impuesto a la escritura.

El avance más importante tuvo lugar a comienzos de 2011, cuando Shanghái comenzó a recaudar impuestos sobre las segundas residencias recién adquiridas por residentes y sobre las primeras residencias de no residentes de acuerdo a su valor de transacción, previa exclusión de la base tributaria de 60 metros cuadrados por persona. La ciudad de Chongqing está apuntando a la residencia unifamiliar existente y a los apartamentos de lujo recién adquiridos por residentes o segundas residencias adquiridas por no residentes. El programa excluye 180 metros cuadrados para residencias unifamiliares y 100 metros cuadrados para apartamentos en Chongqing.

Se ha impuesto el tributo sobre la propiedad a alrededor de 8.000 parcelas en total en estas dos ciudades, si bien este experimento de un año de duración recaudó sólo una pequeña cantidad para el financiamiento de viviendas de bajos ingresos. Aunque la base tributaria, la tasa tributaria y la recaudación han sido muy pequeñas en estas dos ciudades, estos esfuerzos representan un gran paso adelante para la reforma del impuesto sobre la propiedad en China.

Desafíos futuros

La reforma del impuesto sobre la propiedad en China todavía enfrenta enormes desafíos, aun cuando los ciudadanos y los medios de comunicación ya la comprenden mejor. En primer lugar, ha encontrado resistencia desde varios grupos de interés influyentes. Los mayores adversarios de un impuesto sobre la propiedad son los funcionarios gubernamentales locales, además de los inversores y especuladores inmobiliarios. Muchos gobiernos locales creen que la adopción de este impuesto reducirá el valor de las viviendas y, en consecuencia, reducirá la demanda de suelo, lo que disminuirá sustancialmente los aranceles por arriendo de suelo en manos estatales. Además, los funcionarios de los gobiernos locales son evaluados según el papel que cumplan en la estimulación del crecimiento de la economía local, y los proyectos de inversión en infraestructura se usan frecuentemente como un estímulo para el desarrollo de la economía local. Los funcionarios quieren acceso ilimitado a los aranceles de arriendo del suelo, porque se pueden recaudar y gastar con muy poco control y pueden generar una gran cantidad de ingresos durante el período de ejercicio de un funcionario.

Un segundo desafío es el progreso lento de los preparativos legales y de avalúo para el sistema de impuesto sobre la propiedad. Se tienen que promulgar leyes y reglamentaciones sobre el impuesto, incluyendo leyes y normas de avalúo. Habrá que capacitar y certificar a hasta 100.000 valuadores en las normas correspondientes. En tercer lugar, todavía no existe un consenso sobre cómo definir la base tributaria, sus exclusiones y exenciones; la asignación de responsabilidades de administración, fijación de tasas y avalúo; y la distribución de los ingresos tributarios. Y, por último, la falta general de familiaridad con el impuesto sobre la propiedad crea continuos malentendidos e interpretaciones erróneas acerca del impuesto.

Al mismo tiempo, cada vez más residentes urbanos comprenden que un impuesto sobre el avalúo de la propiedad comercial y residencial recaudado anualmente puede generar una fuente sustentable de ingresos para los gobiernos locales y reducir su dependencia de aranceles y cargos de transferencia de propiedad que contribuyen a incrementar el precio de las viviendas. A raíz de la política del gobierno central de restringir la compra de viviendas y de ajustar la oferta monetaria, los aranceles de arriendo del suelo han comenzado a disminuir en muchas ciudades en 2011.

Según un informe reciente del Instituto de Índices de China (2012), los aranceles por transferencia de suelos en 130 ciudades han disminuido un 11 por ciento en comparación con 2010. En Shanghái y Beijing han caído un 16 y 35,7 por ciento, respectivamente. Esta reducción significativa puede también ofrecer oportunidades a los gobiernos locales para encontrar maneras más sustentables de equilibrar la promoción del crecimiento económico con el suministro de bienes y servicios públicos. A largo plazo, el establecimiento de un sistema de impuestos sobre la propiedad para sustituir gradualmente los aranceles a la transferencia del suelo ofrece una manera eficiente, equitativa y sustentable de financiar los desarrollos locales y los egresos gubernamentales.

El impuesto sobre la propiedad se ha percibido como una manera efectiva de reducir los precios de la vivienda, amortiguar la especulación y reducir las tasas de viviendas vacantes. Muchos investigadores creen que los gobiernos locales han tratado de limitar la oferta de suelo para aumentar los precios y maximizar los ingresos, produciendo un rápido aumento de los precios de la vivienda y la falta de viviendas económicas en las zonas urbanas de China. La imposición de tributos sobre la propiedad residencial puede aumentar el costo de oportunidad de dejar las propiedades vacías o sin usar, y reducir los incentivos para el comportamiento especulativo. El impuesto se percibe también como una manera efectiva de reducir la brecha de ingresos y riqueza entre los residentes urbanos y desalentar la inversión especulativa en el sector inmobiliario.

Conclusiones

La reforma del impuesto sobre la propiedad de China está progresando en el área de investigación y experimentos de aplicación, y ha comenzado a ser mejor comprendido y aceptado por los ciudadanos y los gobiernos locales. Pero el establecimiento exitoso de un impuesto sobre la propiedad como una fuente importante de ingresos para el financiamiento público local requiere no sólo de técnicas de avalúo y de diseño tributario sino también de determinación política y de una reforma administrativa. Esta reforma podría generar un cambio fundamental en las relaciones intergubernamentales y el papel del gobierno en la estructura política y económica de China.

El Instituto Lincoln comenzó a respaldar las investigaciones relacionadas con la tributación de la propiedad conjuntamente con el gobierno chino en 2004, con la colaboración del Centro de Desarrollo e Investigaciones del Consejo Estatal, el Ministerio de Finanzas y la Administración Estatal de Impuestos (AEI). En 2007 se estableció en Beijing el Centro de Desarrollo Urbano y Política de Suelos de la Universidad de Peking y el Instituto Lincoln, en parte para ayudar a organizar conferencias internacionales y programas de capacitación para funcionarios de las agencias tributarias de las ciudades piloto. El Centro continúa apoyando a expertos nacionales e internacionales para realizar actividades de investigación y proyectos de demostración en el área de impuestos sobre la propiedad y temas relacionados.

Sobre el autor

Joyce Yanyun Man es senior fellow y directora del Programa para China del Lincoln Institute of Land Policy, y es directora y profesora del Centro de Desarrollo Urbano y Política de Suelos de la Universidad de Peking y el Instituto Lincoln.

Referencias

China Index Institute. 2012. http://www.chinanews.com/estate/2012/01-04/3580986.shtml

Man, Joyce Yanyun. 2011. Local public finance in China: An overview. In China’s local public finance in transition, eds. Joyce Yanyun Man and Yu-Hung Hong. Cambridge, MA: Lincoln Institute of Land Policy.

Man, Joyce Yanyun, Siqi Zheng, and Rongrong Ren. 2011. Housing policy and housing markets: Trends, patterns and affordability. In China’s housing reform and outcomes, ed. Joyce Yanyun Man. Cambridge, MA: Lincoln Institute of Land Policy.

National Bureau of Statistics. 2009. China statistical yearbook. Beijing: China Statistics Press.

The United States is emerging from a great recession whose major hallmark has been the collapse of national housing prices, which grew by 59 percent from 2000 to 2006 and then fell 41 percent by 2011, all in constant dollars. Nationally, real house prices in 2011 were 6 percent below levels in 2000. The housing price collapse had unanticipated contagion effects that helped produce the accompanying financial crisis and the most severe economic downturn since the Great Depression. The share of U.S. mortgages that were delinquent by 90 days or more rose from about 1 percent in 2006 to over 8 percent in 2010. The economic and social costs of this house price bubble and subsequent collapse have been immense.

The benefits of preventing future house price bubbles is obviously great, but realizing such benefits will require that policy makers learn to detect price bubbles as they are forming and then implement policies that will attenuate or mitigate them. A recent Lincoln Institute policy focus report, Preventing House Price Bubbles: Lessons from the 2006–2012 Bust, by James Follain and Seth Giertz, addresses the challenges of diagnosing and treating price bubbles in the real estate market. Their report builds on extensive statistical analysis available in several Lincoln Institute working papers.

While it is common to summarize the recent housing market bust using national indicators (as in the first paragraph above), these national indicators don’t account for great variations in both the levels and changes in housing prices across metropolitan areas. For example, from 1978 to 2011, constant dollar housing prices in Dallas, Texas and Omaha, Nebraska varied by less than 20 percent from their 1978 levels; those in Stockton, California nearly tripled from 1978 to 2006, but by 2011 fell back to their 1978 levels. Local housing markets are all influenced by national economic and financial policies and conditions, but these large differences across metropolitan markets indicate that local conditions play a very important role as well.

A key element of the statistical work by Follain and Giertz is to use metropolitan housing markets as the unit of observation for their analyses, which are based on annual data (for 1980 to 2010) and quarterly data (for 1990 to 2010) for up to 380 metropolitan areas. Their econometric work indicates that house price bubbles can be detected across metropolitan areas and that price changes and the accompanying credit risk vary greatly in size. Stress tests, such as those used to evaluate mortgage credit risk, can be useful indicators of potential price bubbles at the metropolitan level.

Because the levels and changes in housing prices vary greatly across metropolitan areas—with bubble-like price increases in some and essentially stable prices in others—Follain and Giertz conclude that policy measures to mitigate housing bubbles should be tailored to target metropolitan areas or regions rather than be applied uniformly across all metropolitan areas at the national level. Thus monetary policy would be an unattractive intervention to counter house price increases in a few metropolitan areas, because it would affect financing terms across both frothy and stable housing markets. Instead, Follain and Giertz favor policy interventions that would target those metropolitan areas with high price increases. The policy they advance would raise the capital reserve ratio that banks are required to hold against mortgages that they finance in those areas. Such countercyclical capital policies would both dampen house price increases and strengthen the reserves of the issuing banks, improving their ability to withstand any unexpected financial shocks.

Applying prudential housing market policies at the metro-politan level seems to be an obvious thing to do; so why has it not been done before? A major part of the answer is that housing market analysis is benefitting from a revolution in the availability of spatially disaggregated data at the metropolitan, county, and even zip code level. The data required to inform policy interventions targeted at the metropolitan level have only recently become widely available, and such data underpin the empirical work carried out by Follain and Giertz. For more information on their analysis, see http://www.lincolninst.edu/pubs/2245_Preventing-House-Price-Bubbles.

People who work with me are often surprised by the extent to which my philosophical canon derives from low-budget offbeat films, typically from the 1980s. When in need of wisdom, I frequently turn to the teachings of Repo Man or, for this essay, Terry Gilliam’s allegorical masterpiece Time Bandits. In the movie, a group of public workers are employed by the Supreme Being to fill holes in the time-space continuum left from the haste of creating the universe in seven days: “It was a bit of a botched job, you see.”

Like the Time Bandits, policy makers are often tasked to fill holes—actual potholes in roadways, or more theoretical holes that are the artifacts of dysfunctional private markets. One big hole that policy has struggled for decades to fill is the inadequate supply of affordable housing. For example, housing economists in the United States have become quite adept at tracking the size of the hole, which has only become harder to fill since the federal government committed to address it as a national policy priority beginning with the Housing Act of 1949, part of President Harry S. Truman’s Fair Deal.

Perhaps our collective failure to solve the affordable housing deficit over the last 66 years stems from wrongheaded analysis of the problem, and the conclusion that market-based solutions can be designed to solve the mismatch between the supply of affordable housing and demand for it. In his 1949 State of the Union address, President Truman noted that to fill the needs of millions of families with inadequate housing, “Most of the houses we need will have to be built by private enterprise, without public subsidy.”

To support this claim, permit me a short departure into market theory. From the now-preferred mathematical approach to economic analysis, a market is simply a system of partial differential equations that is solved by a single price. The partial differential equations capture the complex decisions made by consumers and producers of goods, reconciling tastes, preferences, and budgets of consumers with the technical complexities of producing goods to arrive at a price that clears the market by settling all transactions that suppliers and consumers of goods are willing to make.

Acclaimed economists Arrow, Debreu, and McKenzie proved the theoretical existence of a single set of prices that can simultaneously solve for the “general equilibrium” of all markets in a national or global economy. One important aspect of this Nobel Prize–winning contribution was the observation that a unique price cleared each market—one market, one price. There was no expectation that a single price could maintain equilibrium in two markets. But this is the fundamental flaw of the housing market—it is actually two markets, not one. Housing markets supply both shelter for local consumption and a globally tradable investment good made possible by broad capital markets that serve global investors. This dual-market status used to be more descriptive of owner-occupied housing, but, with the proliferation of real estate investment trusts (REITs), rental markets are now in the same boat.

Markets for consumption goods behave very differently than investment markets, responding to different “fundamentals.” On the supply side, prices for consumption goods are dictated by production costs, while prices in investment markets are dictated by expected returns. On the demand side, such things as tastes and preferences, household incomes, and demographics determine the price of housing as shelter. Investment demand for housing is dictated by factors like liquidity and liquidity preferences of investors, expected returns on alternative investments, or interest rates.

In developed countries, global capital markets and the market for shelter collide locally with little chance of reconciliation. Local households compete with global investors to decide the character and quantity of housing that is produced. In markets that attract global investment, plenty of housing is produced, but shortages of affordable units are acute, and worsen over time. This is because a huge share of new housing is produced to maximize investment return, not to meet the needs of the local population for shelter. For example, there is no shortage of global investment willing to participate in developing $100 million apartments in New York City. But affordable housing, being much harder to finance, is in short supply. And in markets that have been abandoned by global capital, house prices fall below production costs, and surplus housing accumulates and decays. In extreme cases such as Detroit, market order can only be restored by demolishing thousands of abandoned homes and buildings.

Perhaps it is time that we reconsider the analysis that led President Truman, and thousands of housing policy makers after him, to conclude that one could forge market-based solutions to the challenge of sheltering a country’s population. Truman concluded that “By producing too few rental units and too large a proportion of high-priced houses, the building industry is rapidly pricing itself out of the market.” But Truman was thinking about the market for shelter, not investment. It is remarkable to note that the number of housing units supplied in developed countries such as the United States significantly exceeds the number of households. In 2010, the U.S. Census estimated that there were 131 million units of housing in the country and 118 million households—one in seven housing units were vacant. It is even more shocking to note that in the United States this oversupply of housing characterizes every metropolitan market in the country—even metropolitan markets with extreme shortages of affordable housing. In 2010, 8.5 percent of housing units were vacant in Greater Boston, 9.1 percent in the San Francisco Bay area, and 10.2 percent in Washington, DC. The problem is that many households have insufficient incomes to afford the housing that is available.

In the end, rather than fill the holes in the fabric of time and space, the Time Bandits decided to take advantage of them to “get bloody stinking rich.” The bandits sought to capitalize on celestial imperfections in the same way that global investors seek returns from short-term market dislocations. To illustrate the dangers of naked speculation in unregulated markets, consider an apocryphal tale from a very different market. In 1974, heavy rains during planting season in Bangladesh suggested that rice might be in short supply at harvest time. In anticipation of these shortages, rice prices started to rise. Savvy commodity speculators realized that there would be a good return on any rice that was held off the market. Despite the fact that the actual harvest produced a bumper crop, the interaction between market expectations and market manipulations by commodity investors produced one of the worst famines of the 20th century—with an estimated 1.5 million famine-related fatalities. The famine was not the result of real food shortages. The collision of the market for goods and the market for speculative investment priced rice out of the reach of the local populations, with landless families suffering mortality at three times the rate of families with land.

Perhaps shelter and food are too important to be left to unregulated markets to allocate. In light of the damage that the conflict between the market for goods and the market for investment can inflict on local populations, perhaps public policy should focus on protecting a share of the market—and the public—from the ravages of speculation. In this issue, we describe some nascent efforts to produce permanently affordable housing by insulating it from speculation—through community land trusts, inclusionary housing, and housing cooperatives. Miriam Axel-Lute and Dana Hawkins-Simons discuss the mechanics of organizing local community land trusts. Loren Berlin describes efforts to preserve affordable housing in the form of manufactured homes and to promote permanent affordability of that stock through the conversion of manufactured housing communities to limited equity cooperatives.

On more cautionary notes: Cynthia Goytia discusses the ways that low-income communities circumvent housing regulations that drive up housing costs to produce their own affordable but substandard shelter in informal settlements around Latin American cities; and Li Sun and Zhi Liu discuss the tenuous status of one-quarter of urban Chinese households that purchased affordable shelter with uncertain property rights on collectively owned land at the rapidly developing edge of cities and in “urban villages,” former rural settlements now surrounded by modern construction. As capital markets deepen in these countries, the competition between housing as investment good and housing as shelter will likely exacerbate informality in Latin American cities and make property rights of these Chinese families more precarious. After almost seven decades of failed efforts to get private markets to meet populations’ needs for affordable shelter, it might be time to develop, and to export, another approach that is based on a more realistic understanding of the complexity of housing and capital markets.