Land Use Regulations and Property Values: The 'Windfalls Capture' Idea Revisited

Abstract

The idea of reaping the 'windfalls' in land values due to planning decisions is by no means new. The underlying rationale is that much of the value of real property is created not by the landowner’s work, but by government policies that grant development rights or by broad economic and social trends. Governments need the funds collected for financing public services of various kinds.

This paper opens with the conceptual debate about value capture and its rationale, presenting the positions of proponents as well as critics. Drawing on the author’s comparative research on the laws and practices in 13 advanced-economy countries around the world, the paper then addresses the degree to which recapture of the “unearned increment” from planning decisions is indeed a viable approach. Should policymakers adopt it for financing or incentivizing the delivery of public services and affordable housing?

Only three countries among the 13 have adopted laws and policies about value capture at some point in their history. What lessons may be learned from their experiences? The findings show that the idea of value capture in its pure form has failed to catch on widely among advanced economies, with only a few exceptions. However, the basic idea of the “unearned increment” as a financial source for public services has not died away. In recent decades, several “mutations" of this idea have been gaining popularity in many countries, but in widely different forms and degrees. I call these "indirect modes" of value capture. These are much more complex and less “elegant” than the direct value-capture notion, and present legal and public-policy challenges. Yet in some contexts, these modes are more realistic instruments for funding public services.

The paper concludes with a set of assumptions (for further research) about the legal-administrative conditions for the successful application of the indirect modes of value capture. These are still lacking even in some advanced-economy countries.

Keywords: land policy, property rights, value capture, land use law

JEL Classification: K11, O21