Land value tax can fix the incentives plaguing our housing market

So long as land—what drives home values—is an investment, cost of living will be high. A land value tax would reduce incentives to speculate on land, encourage supply, and bring down the #1 cost of living for Canadians: rent and mortgages. If this was already implemented, homes today would be 40% cheaper and most households could experience net tax relief.

Housing Market Reform Needs a Stable Foundation (2 minute primer)

No amount of public investment or regulation change can fix bad financial incentives that are driving up prices, restricting supply, and making poor use of existing homes. Instead, a land value tax would align incentives that impact demand, supply, and allocation of housing — ensuring the market works to create affordability, forever.

  • Demand — The buyer’s market for housing is both one for living and one for wealth creation, due to our expectations to profit from increasing land price, the part of housing that goes up in value. Land value tax reduces returns from simply holding property and waiting for it to appreciate, eliminating speculative demand that drives up pricing.

  • Supply — Land value tax encourages land to be put to it highest use, making it more profitable to build and lobby for zoning change than to remain underutilized where more density is needed. While property tax penalizes building value and improvements, land value tax discourages underutilization, especially in city centres.

  • Allocation — There are decades worth of construction in empty bedrooms already available in Canada. A land value tax and rebate system provides individual financial incentives to make better use of what we have, addressing a severe mismatch between overhousing (people with more than they need to live) and underhousing (those with not enough).

Calls to build millions of new homes and improve zoning regulation can help, but they’re not permanent solutions to the incentives today that drive tens of millions of people in the market towards limiting supply, speculation-driven price demand, or underutilization of available housing.

A land value tax that captures 3/4 of the rental value of Canada’s land could bring down land prices by 75% and make the median home 42% cheaper. By shifting taxes away from personal incomes onto land, we could raise 0% income tax bracket to $88,000/year, so that 91% of Canadians pay no personal income tax.

This a fair and effective way to restore housing affordability and let Canadians keep more of their hard-earned paycheques.

Going Deeper

Land value tax changes the incentives in the housing market to favour families and bring down costs: reduce the speculative demand driving up prices, encourage new and higher density supply where it’s needed, and make better use of already existing supply. We can return this value of land back to Canadians through reduced income taxes or land rebates.

Intro: The true magnitude Canada’s housing crisis

Canada is a world leader in many things — among them, the ratio of home prices to incomes.

Housing is the ‘greatest source of inequality’ in Canada, impoverishing renters and owners alike.

One-third of Canadians who own a home say they’re ‘house poor’; 30% of households are unable to meet all of their financial commitments. 1 in 8 Canadian households are in core housing need, spending more than 30% of their pre-tax income on shelter, and the bottom 50% of renters are in unaffordable or severely unaffordable housing.

Canadian household debt-to-income has reached record highs and mortgage debt topped $2 trillion, equivalent to nearly 100% of GDP. This threatens not only our households, but our economy as a whole: research shows that household debt levels above 70% of GDP harm economic output.

Mortgage debt at all-time highs

Debt-to-Income at all time highs

Canadians are suffering from runaway home prices (entirely decoupled from incomes) and unsustainable levels of household debt. We explore how a land value tax can fix incentives in the market that drive demand, supply, and allocation of homes to make housing more affordable again.

1. A market for families, not speculators

Speculating on land is profitable.

Average Annual Growth in Land Value

8.3%

(1990-2022; Statcan)

Average Annual Return on Equities

5.5%

(1970-2015; PWL Capital)

The buyer’s market for housing is both one for living and one for wealth creation. Land prices — the part of housing that goes up in value — appreciates 8% yearly on average, making it more attractive as an investment asset than stocks or bonds. This shared expectation that anyone can build wealth by investing in land incentivizes speculative bidding behaviour that has pushed up home prices far beyond demand for living.

Real estate (blue in chart below) dwarfs everything else as the fastest growing sector of Canada’s wealth, driven largely by rising land values.

Investors are buying up a growing share of homes and most new condos — as high as 100% in some areas.

There’s a terrifying trend of investors (those who own multiple homes) buying up a growing share of properties, and investor ownership is growing 60% faster than everyone else. Across the median city in BC, Ontario, and Atlantic Canada, 1/3 of new homes are being bought by investors and over 20% of homes are already owned by investors.

There’s no sign that this investor trend is slowing down: The majority of condos built between 2016-2020 are owned by investors. In one Newfoundland town, half of existing homes and 90%+ of new constructions since 2016 are owned by investors. Across Canada, the number of companies owning at least 100 homes is on the rise. One company in Northern Canada owns as much as 80% of private, multi-unit rental housing.

Across Canada, home prices are largely being driven by an excess of speculative demand from investors, not just a supply shortage.

A neverending cycle of price speculation and rising debt

As home prices continue to go up, Canadians find themselves stuck in a vicious feedback cycle of rising land values and debt: land values provide collateral for credit from banks, which increases the amount of dollars to bid up land values, and so on.

Home prices go as high as banks are willing to lend against it — and the debt that Canadians are willing to take on. Canadian homeowners are paying more in mortgage interest than ever, as excess credit, speculative demand, and periods of low interest rates continue to drive asset appreciation. (Learn more about this feedback cycle of land value and private credit.)

Land value tax reduces speculative demand, driving down prices

If we want to bring down the #1 cost of living for Canadians, rents and mortgages, then we need to fix the #1 incentive driving it up: the expectation to profit from rising land values. It doesn’t matter how much supply we build when large corporate landlords and housing speculators have ongoing financial incentives to buy property just to hold and rent out, waiting for prices to go up, and a $100B/year financial industry that profits when people’s cost of housing goes up. Prices toady are driven by financial motivations, rather than families’ need to live.

A land value tax reduces financial returns from simply holding property and waiting for it to appreciate, eliminating the speculative demand that drives up prices. It’s effectively a fee we all pay for using land — the shared inheritance of humanity — just like how we pay for electricity and other utilities, which would lower its returns as an investment asset and bring down the cost of housing.

For example: a 5.5% land value tax would make land as an investment return less than 3% (down from 8% historically), driving speculators out to invest in other investment classes like equities, which have historically returned 6% on average annually. Taxing land value also constrains upwards bidding behaviour by reducing how much banks can lend homeowners within their housing budget, since it increases the carrying cost of land.

Studies from around the world have shown that a land value tax can bring down prices:

  • A 5.55% tax on US land values (accompanied with lower taxes on income and capital) could reduce land prices by about 40%. Raising it to 20% (while completely eliminating taxes on income and capital) could reduce prices by 75%.

  • Research from Denmark showed that raising land value taxes substantially lowered housing prices.

A land value tax shifts incentives in the housing market to dramatically favour families over speculators, stripping away unproductive speculation so that prices better reflect the demand for living.

Land value tax encourages land to be put to it highest use, making it more profitable to build and lobby for zoning change than to keep it underutilized, especially in urban centres where more density is needed. While property tax penalizes building value and improvements, taxing land value discourages idle land speculation and the underuse, waste, and sprawling development of sites.

Evidence from Pennsylvania showed that shifting taxes away from property improvements towards land value made it more profitable to build upon vacant and underdeveloped sites, resulting in more new home constructions and renovations and more tax deductions for many property owners.

With a sufficiently high land value tax, people would no longer make money from simply possessing land, but from doing valuable things like building new homes, making improvements to make them more livable, and using the land for productive commercial activity. Developers would target and design homes for families, rather than big money interests that want generic homes for the sole purpose of being rented out.

Land value tax encourages higher density development and multi-unit housing where it’s needed, reducing urban sprawl and increasing supply near urban centres. People with homes where there should be skyscrapers will have the financial incentive to sell to developers who would make better use of it, and vote in city councillors who support appropriate zoning changes. As one former mayoral candidate of Toronto, Chloe Brown wrote: “If all communities within Toronto adopted land value taxes, we could build more transitional and smaller housing like, garden suites and tiny houses, to over time bring down housing costs.”

It incentivizes landowners with empty or run-down buildings to get them back into use, and they won’t be taxed on these improvements under a land value tax (unlike a property tax, which takes into account the value of structures and improvements). As a result, communities could see increased housing supply and neighbourhoods with lots of empty properties could be revitalized.

Finally, lower land prices would make it more affordable for local authorities and housing associations to acquire land for social housing, further increasing the supply of housing at affordable rents.

2. Encourage new supply

There are decades worth of constructions in empty housing already available in Canada. A land value tax and rebate system provides individual financial incentives to make better use of what we have, addressing a severe mismatch between overhousing (people with more than they need to live) and underhousing (those with not enough).

In Ontario alone, there are 5 million spare bedrooms, equivalent to 25 years worth of constructions. Over 400,000 homes in Ontario have 3 or more empty bedrooms — nearly 1.3 million empty bedrooms in family-sized homes. At the same time, more than 400,000 Ontario households (8% of households) are underhoused. The number of spare bedrooms in the homes of the over-housed represent 10.5x the number of bedrooms the under-housed are short.

Calls to build 1.5 million homes in Ontario and improved zoning regulation can help, but these aren’t permanent solutions to the incentives that drive tens of millions of people in the market towards speculation-driven price demand, limiting supply, and underutilization of available housing.

A land value tax and rebate system could help address this by providing individual financial incentives for people to right-size their home to their needs, whether it's a retiree downsizing or young families upsizing.

There is a growing trend of older Canadians who don’t see value in downsizing, since the benefits of staying put often far outweigh those of moving. A land value tax simply offers a financial incentive for households who choose to, as they could see their tax reduced, while continuing to benefit from land rebate dividends and lower income taxes. Those who choose not to would still benefit from lower taxes and dividends.

A land value tax could also encourage more development of mid-range “gentle density” housing, often referred to as the “missing middle”—e.g. row homes, townhomes, semi-detached, multiplexes, apartments, and medium-to-higher density properties in urban centres—which appeals to households looking to either up or downsize, furthering narrowing the gap between over- and underhousing.

3. Make better use of existing homes

4. Lower taxes, cheaper homes, and less debt for all

We’re already paying rent for land — we might as well turn this value back to Canadians.

So how do we afford a land value tax? If you’re renting or paying down a mortgage, you’re already paying rent to use land. It’s a large part of both what a tenant pays in rent and what a homeowner pays the bank in mortgage interest.

What if this rental value of land came back to us instead through lower income taxes and cheaper homes? Instead of taxing hard work, what if land value tax was how we contributed to our government revenues?

A tax on the value of land, the most valuable asset in the economy, could take the place of income taxes without any cuts to public services, leaving more money in Canadians’ pockets to spend and invest in the real economy. And by fixing the supply, demand, and allocation keeping prices high, a land value tax could cause prices to drop 75% and make the median home 42% cheaper.

A land value tax could generate enough revenue to eliminate all federal and provincial taxes on income under $88,000/year. Under this scenario, 91% of Canadians would pay no personal income tax. Or it could pay a dividend of $6,000/year to every Canadian adult. (Read more in our paper Natural Common Wealth and Economic Rent in Canada.)

Less household debt for Canadians

A house is worth whatever a bank is willing to lend against it — and the amount of debt that people are able to afford. A land value tax reduces how much banks can lend someone within their housing budget, as it increases the carrying cost of land and ‘crowds out’ the credit to bid up housing prices.

Less credit means house prices stay lower as bidding behaviour is constrained. This shrinks the total amount of debt that Canadian households take on, reducing the possibility of a debt spiral and ultimately improving the stability of Canada’s financial sector.

Families would still purchase the value of a home, but instead of paying interest on the credit for the land purchase, they would pay tax on the value of the land underneath their home, while benefiting from lower income taxes. This means that homeowners have an unchanged stream of payments to make, but the total amount of household debt would drop significantly.

An additional benefit of taxing land value, if paired with appropriate credit controls, is that it would allow the Bank of Canada to lower interest rates with less risk of inflation, making home loans more affordable while benefiting Canadian businesses and the overall economy.

Let’s return this value back to Canadians

For most of us, we're already spending this money through rents and mortgage payments. We might as well share in the value of the nation’s land to the benefit of us all. We could undercut the big corporate landlords and banks that are profiting from the rising cost of living, while rewarding working people and making housing more affordable.

A national Land Value Tax shift plan

A tax on land value could make homes more affordable while keeping more money in Canadians’ pockets. The money from a land value tax could be used to 1) eliminate all federal and provincial taxes on income under $88,000/year, 2) eliminate all federal income tax, or 3) pay every Canadian adult a $6,000/year dividend.

Option 1

Federal & Provincial Tax Shift

Eliminate all federal & provincial income tax under $88,000/year. 91% of Canadians pay no income tax.

Option 2

Federal Tax Shift

Eliminate all federal personal income tax.

Option 3

Dividend Only

$6,000/year in dividends per Canadian adult. No changes to income tax

Funded by collecting $194B/year from a national land value tax. We could go even further by collecting over $241B/year of economic rent from Canada’s land and natural resources.

Read more on benefits of a land value tax

  • With a land value tax, we can reduce the speculative demand that is bidding up land values — the part of housing that goes up — and as a result, make homes as a long-term investment asset less attractive compared to equities and other productive investments. Escalating market value of land, the main component in the huge increase in house prices, would be kept under control, because the bulk of the increase in land values would have been collected through a land value tax.

    Research shows that raising taxes on land value in the US from 0.55% to 5.55%, while lowering taxes on capital and labour, could reduce land values by 40%; raising it to 20% of land values and eliminating taxes on capital and labour could reduce land values by 75%. Likewise, data from Denmark showed that raising land value taxes reduced home prices substantially.

  • A land value tax changes how people win in real estate, shifting financial incentives away from speculators and towards honest and productive work that benefit our communities, like building new homes and improving them for people to live in.

    Evidence from Pennsylvania shows that shifting taxes away from property improvements towards land values resulted in more new construction and renovation, higher profitability to build upon vacant and underdeveloped sites, and more tax deductions for many property owners.

    A land value tax would end the practice of owners holding large land banks out of use for decades, who would instead have the incentive to sell the land or develop it, boosting the supply of homes where needed.

    It would encourage owners of homes on expensive land with low-density buildings to sell to developers who would build higher-density housing, and motivate them to vote in city councillors who support the necessary upzoning. It changes financial incentives for people to right-size their home to their needs, whether it's a retiree downsizing or young families upsizing.

    Finally, lower land prices would make it more affordable for local authorities and housing associations to acquire land for social housing, increasing the supply of housing at affordable rents.

  • A house is worth whatever a bank is willing to lend against it — and the size of a mortgage households can take on while staying within their housing budget. Excess credit from banks combined with speculative investor behaviour means more money bidding up home prices. Periods of low interest rates allow people to take on even larger mortgages, bidding up prices even more.

    A land value tax simulates high interest rates by increasing the carrying cost of the land, crowding out the amount of credit that a bank can lend someone within their housing budget. Less credit issued means house prices stay lower as bidding behaviour is constrained.

    Families would still purchase the value of a home, but instead of paying interest on the credit for the land purchase, they would pay tax on the land value. This means that homeowners have an unchanged stream of payments to make, but the total amount of credit would drop significantly.

  • A land value tax lowers the amount of credit that banks can issue homebuyers, shrinking household debt and reducing the possibility of a debt spiral — ultimately improving the stability of Canada’s financial sector.

    It would mitigate booms and busts in the housing market and the negative impacts they have on the broader economy. An additional benefit of taxing land value, if paired with appropriate credit controls, is that it would allow the Bank of Canada to lower interest rates with less risk of inflation, making home loans more affordable while also benefiting Canadian businesses and the overall economy.

  • In our economic rents report, we estimate $362.5 billion/year in additional revenue that could be collected from a land value tax, representing 17% of Canada’s annual GDP. This is value that’s currently locked up in land speculation that could instead be spent and invested in real economic activity: creating jobs, raising wages, and supporting Canadian businesses.

    Research shows that raising taxes on land values in the US from 0.55% to 5.55%, and lowering taxes on capital and labour, could grow the economy by 15% — adding $3 trillion to US GDP — while raising pre-tax real wages by 4%.

    And because land is immovable and can neither be created no destroyed (generally), a land value tax is considered the most economically efficient and least distortive source of public revenue, because it creates no harm to economic productivity and no disincentive to workers and businesses, unlike income or consumption taxes.

    The resulting development boom would create many more jobs in the construction trades. Commercial and industrial construction would be stimulated, which would create more commercial and industrial jobs.

    Subsidies would no longer be needed to make it profitable for private enterprise to take on most of the rebuilding and revitalizing of our cities. (According to the PBO, the federal government will spend $70B from 2018-19 to 2027-28 on a National Housing Strategy.) Higher density developments would end up saving our governments billions of dollars now wasted by urban sprawl, since all municipal costs are multiplied by distance.

  • Since a land value tax encourages denser housing development, it can help reduce urban sprawl, which has been correlated with increased ecological footprint, pollution, traffic congestion, commute times, and a decline in community distinctiveness and cohesiveness, in addition to wildlife habitat destruction and the fragmentation of remaining natural areas.

    It incentivizes landowners with empty or run-down buildings to get them back into use, especially if paired with corresponding shift away from taxes on property improvements. As a result, neighbourhoods which previously had lots of empty properties could be revitalized.

  • Rising land values are the result of the efforts and investments of a community and gifts of nature, rather than the efforts any individual. Taxing land value allows us to capture this community-created value and re-invest it to benefit all Canadians, through dividends and lower taxes.

Report: $240B/year of economic rent from Canada’s land and natural resources

In this paper, we estimate the total economic rents (or unearned profits) from Canada’s land and natural resources that could be collected as new revenue, without inhibiting productive investment. A land value tax that captures 3/4 of the rental value of land could generate enough revenue to raise the 0% personal income tax bracket to $88,000/year.

Read the Report →