Economic Indicators and their ties to Land Value
April 2024 | By Jack Jol
What’s driving up property values?
Key Points:
Growing Canadian property values can be largely accounted for with growing land value.
Land value growth rates are continuing to rise above population and dwelling structure value growth rates.
Population and GDP growth cannot alone account for the magnitude or rate at which housing costs are increasing.
Property values in Canada are experiencing a rapid surge, with the focal point of this phenomenon being the escalating price of land. Our investigation delves into the speed of this growth and the underlying causes fueling this surge. Our data-driven analysis of Canada's economic landscape reveals that traditional metrics like population and economic expansion fail to fully elucidate the burgeoning value of Canadian land. This discrepancy prompts us to scrutinize profit-driven activities such as land speculation as a significant culprit behind the housing crisis. While a comprehensive examination of the Canadian housing crisis is outside the purview of this paper, our findings shed light on the role of speculative practices in shaping property dynamics.
First Things First, It’s Land
The figure above displays three metrics. StatCan’s quarterly assessment of the total land value beneath Canadian homes, the total value of the structures of those homes, and the summed property value of all Canadian homes. The last metric is a combination of the two previous values. With this figure one can note just how rapidly land value, and reflectively property value, has grown between the start of the pandemic in 2020 and the end of the dataset in 2022. It can be observed that dwelling (structure) value grows fairly steadily for the most part, likely reflecting the cost of materials, labour and a growing number of homes, but land value acts much more erratically.
Reporting the percentage growth over the last fifteen years demonstrates the same takeaway. In the time period when dwellings increased in value by about 85%, the land beneath them had appreciated by more than 130%. Land has been accumulating value about 1.5 times faster than structures, and thus is the more significant factor driving up property values.
The dataset shows three significant downturns in land value which, expectedly, are representative of notable periods for the Canadian housing market. First, one can observe the downturn following the 2008 Global Financial Crisis, then the period in 2017 when Canadians saw their prices tumble and new laws had to be passed to regulate the market, and once again in 2022 with the pandemic downturn (the largest downturn so far). Each downturn and the subsequent period of economic growth seem to exhibit a larger scale than their predecessor, leading to the following questions: what drives this worsening cycle, and where does this leave room for the improvement of housing affordability?
In order to answer these questions we first must observe the interaction between land value and its commonly credited driving factors.
It’s Not Population…
The figure above offers a quick glance at Canada’s population growth compared to the land and dwelling values in Canada over the last three decades.
Here we can see the relative growth of each asset over the population size. Within the last 30 or so years the Canadian population has continued to grow fairly steadily. The increase of these quotients over time indicates that structure and especially land values are growing disproportionately to the population's growth. This occurred most notably within the last five years and amidst the pandemic.
If this graph were an approximately horizontal line (as it can be seen existing in this state in the years 1990-2000) then it would be reasonable to claim that land value is growing proportionately to the population. It can be seen however that this is not the case. Other than immediately after notable drops in the housing market, it is clear that land value, and in return property value, is exhibiting significantly more growth than the population size could account for. This suggests that the growing population is not the driving factor behind the accelerating boom of housing prices. In relation to population growth, the explosive scale of land value growth after the start of the pandemic is completely unprecedented.
It's Not GDP
The case is often made that growing housing prices are simply reflective of the country's growing finances. Similar to population, we can observe that, while yes, both metrics are growing, land value is growing unaccountably faster. In addition, we can observe that this hasn't always been the case. Prior to 2000, both land and structure value can be observed to underperform GDP growth (observable with a downward slope for that period), and while the cost of a structure (i.e. labour, taxes, fees, and materials) may be seen behaving fairly similarly to GDP growth between 2008 and 2017, it's clear that the cost of land is significantly outgrowing GDP over this time period. Just like the previous population-related figure, following the pandemic, the cost of land exhibited unprecedented and disproportionate growth when compared to that of the nation’s GDP.
If Not That Then What?
All this points to some other factor driving property values. The most likely culprit? Land speculation. The act of buying a house for the sole purpose of holding it until you can sell it at a higher price. Land is a finite resource, and dwellings are a necessity of life. Speculators cash in on these facts by taking as much of this limited resource as possible, and simply holding on to it until they eventually sell for windfall profits. In this time period they often do little to nothing with the actual land/property as they have no reason to drive up the property value when the money is in the land itself. Having a small wealthy portion of the population (as well as banks, firms, and foreign investors) bid against families in an attempt to hold as much property as possible would inflate land prices as observed, emphasizing land’s value as a limited commodity. Unfortunately families buying principal residences are also willing to bid up prices, hold back on selling when an area needs more density, or resist greater density altogether. This is done in anticipation of homes growing in value in perpetuity. An excess of this behavior could account for the unprecedented levels of growth seen in the last decade and especially since the start of the pandemic.
Conclusion
Contrary to popular belief, neither population growth nor GDP escalation emerges as the sole catalyst for the meteoric rise in land value. Instead, our analysis unveils the pervasive influence of land speculation, wherein the finite nature of land becomes a playground for profit maximization, often at the expense of housing affordability for ordinary Canadians.
The disproportionate growth of land value vis-à-vis GDP and population growth underscores the urgent need for a paradigm shift in our approach to housing policy and urban planning.
Addressing the root causes of speculative behavior demands a multi-pronged strategy, encompassing regulatory reforms, taxation measures, and incentives to promote equitable land utilization and housing affordability.
One such taxing measure being explored is the implementation of a land value tax. This is a tax, not on property value, but specifically on the value of the land owned. In our report, Natural Common Wealth and Economic Rent in Canada, we estimate that a land value tax which captures ¾ of the rental value of Canada’s land could bring down land prices by 75% and make the median home 42% cheaper. This tax scheme wouldn’t come as solely a detriment to households. In the article linked below, we demonstrate how this shift could restructure our income tax system by raising the 0% income tax bracket to $88,000/year, thus resulting in 91% of Canadians no longer paying a personal income tax. These combined changes could restore housing affordability and let Canadians keep more of their hard-earned paycheques.
For more on the benefits of a land value tax and how it could improve the housing market, check out: https://www.commonwealth.ca/landvaluetax
