Land Options for Housing: How New Property Rights Can Break Old Land Monopolies

Abstract

The world today is afflicted by inequality of wealth created in large part by monopolistic ownership of land. Across the globe, in cities like Rio de Janeiro, Yangon, Johannesburg, and London, landowners in control of urban real estate in hot job markets have created a housing shortage. Hong Kong, with the least affordable housing in the world, provides a particularly apt example of how property law protects such monopolies – and also how the creation of new property rights can break them up.

In this paper we use Hong Kong as a case study to suggest both a diagnosis and a solution to two aspects of property law that slow down the creation of housing. First, the division of property rights between private owners and the government creates a bilateral monopoly that results in gridlock. Second, re-allocating property rights to end such gridlock is impeded by the reciprocal causation between property rights and political influence – what we will call a “constituency effect” of property law. Rather than attempt a frontal assault on existing holdings that would likely be foiled by such constituency effects, we suggest that the government should create entirely new property rights around which new interest groups could form. By giving every Hong Kong resident “land options for housing” (LOHs), the government could create a competitive market for development rights that simultaneously ends the gridlock of monopoly and creates a new constituency to lobby for more housing. Under our proposal, property owners would compete with each other to purchase LOHs from LOH holders in order to build high-density housing. Such a system would simultaneously give the LOH holders a stake in moving land from low-value to high-value uses while providing ample compensation to existing stakeholders.

The problem posed by Hong Hong’s mix of bilateral monopoly and constituency effects transcends Hong Kong. We also examine how these connected obstacles to housing construction can defeat or be defeated by land options in places ranging from Israel to New York City. There is a larger lesson for property theory at stake in the interaction of bilateral monopolies with constituency effects. The sense of entitlement generated by existing property rights limits politicians’ ability to design new, more flexible forms of property. There are, in other words, transaction costs generated by property that impede not only economic but also political transactions. Overcoming those transaction costs requires legislative proposals that create new constituencies but yet are also not blocked by the old ones.