How Basic Income Will Impact Rent

One fear about Universal Basic Income (UBI) is that it could cause rents to increase, partially or entirely diverting the benefit of UBI to landlords.

How Basic Income Will Impact Rent
How Basic Income Will Impact Rent

By Karl Widerquist

See original post here.

One fear about Universal Basic Income (UBI) is that it could cause rents to increase, partially or entirely diverting the benefit of UBI to landlords.

            The real estate market has a lot of underlying problems that need to be addressed on their own. Before I consider how we can address those problems, I’ll consider how UBI will affect real estate prices assuming those problems remain in place.

            You might think, UBI goes to everyone. Everyone has to buy or rent homes. Therefore, the price of all housing will increase. But that’s not how it works.

  Although UBI goes to everyone, it does not increase everyone’s income, because we have to increase taxes to counteract the inflationary pressure UBI introduces into the economy. Relatively low-income people are “net beneficiaries” of UBI—meaning that they receive more in UBI than they pay in taxes. Relatively high-income people are “net contributors” who pay more in taxes than they receive in UBI. There will be a substantial number of people in the middle whose tax increase is about the same size as the UBI they receive.

            UBI puts upward pressure on the cost of real estate in areas where net beneficiaries own or rent, but it puts downward pressure on the cost of real estate in areas where net contributors own or rent. That means that some of the benefits of UBI will be diverted to low-income landlords, and that’s a problem to be addressed. But it also means greater housing equality, less income-based housing segregation, and therefore less school segregation.

            As the difference between what low-income people and middle-income people can pay for housing declines, low-income people will have more access to better quality housing. You get what you pay for, or more practically, you get what you can afford to pay for. Homeless people and people at risk of homelessness will be the greatest beneficiaries because they will be reliably able to pay their rent every month, giving landlords a better incentive to rent to them.

            The taxes paid by net contributors put downward pressure on the value of their homes, but perhaps more importantly, it also puts downward pressure on the real estate they hold as investment property. As we have cut taxes over the last 50 years, wealthy people have put more and more of their investment money into both commercial and residential land, pushing up land values for everyone, making parking money in real estate attractive, even as low- and middle-income people are less able to afford to rent property. Taxes targeting the 1% will help reverse this trend, making housing and commercial real estate more affordable for everyone.

            These benefits do not eliminate the possibility that landlords will capture some of the benefits of UBI. To reverse that possibility, we need policies to address some of the underlying problems with the real estate market. These include changing the many unfair and inefficient real estate tax policies that greatly favor wealthy landowners. For example, landlords are allowed to claim a tax deduction for “depreciation” of an asset that does not depreciate. We should also change zoning laws to allow—or even to require—more dense, more walkable, more public-transit friendly neighborhoods and to get rid of the large parking lots and the unattractive empty lawns surrounding commercial parking lots in most American suburbs.

            Perhaps the most important thing that we can do to create more affordable housing is to shift taxation from income and real estate to land value. That is, taxes based on the locational value of land alone rather than on total real estate value, which includes buildings and other improvements to the land. It is not difficult for economists to separate the value of land from the value of improvements on it by comparing the price of vacant lots and built properties in the same neighborhood. The benefits of land value taxation are so great and so often discussed that I don’t need to go into them in detail in this short article, except to explain that they actually put downward pressure on real estate and rental prices rather than upward pressure as one might expect.

            When land value is untaxed or under-taxed, it often pays investors to park their money in vacant buildings and vacant lots, reselling them without improvement as the price goes up. If land value is highly taxed, while building and other improvements to real estate are not taxed, it pays investors to buy land only if they are going to put it to its highest value use, making more effective residential and commercial space available on the same (or even a smaller) amount of privately held land, especially if land taxes are accompanied by the zoning law reforms mentioned above.

            I’ve argued that despite the underlying problems in the real estate market, and the likelihood that landlords will capture some the benefits of UBI, they won’t be able to capture all of the benefits. UBI will do a lot of good for middle- and low-income renters and homeowners even if it is not accompanied by another other reform. And, if we introduce real estate market reforms along with UBI, we can ensure that virtually all the benefits of UBI go to people rather than landlords.
– Karl Widerquist, Søciété Café, Msheireb, Doha, Qatar, September 8, 2023

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