Land and Money Reform Synergy in New Zealand

Jul 24, 2012 Comments Off on Land and Money Reform Synergy in New Zealand by

A Land Backed Currency Issued By A Local Authority. This is an intriguing and very innovative concept developed in New Zealand by Deirdre Kent and published in the Ethical Markets Review. The paper is very long so I will post only excerpts, the summary and autobiographic details.  It links a land value tax with a new local government issued money and with a new medium of land ownership that recalls Chris Cook’s Capital Partnership model.  The full paper can be downloaded here:  A Land Backed Currency Issued By A Local Authority 

Proposal for issuing Rates Vouchers using a Contract to pay an ongoing Land Levy:

To balance the ‘patriarchal’ monoculture of bank issued interest-bearing debt currency we need to have a series of ‘matrifocal’ smaller currencies issued with a circulation incentive. The proposal is to let Councils issue Rates Vouchers. This new money is designed to decay not increase in value. In order to link the new money to the value of the land we propose the Council contract with would-be property owners to give them newly created Rates Vouchers, (valid for payment of rates) to buy their land. In exchange the landowner creates a land covenant requiring the landowner to pay a regular sum to Council, this sum to be a little less than what they would have paid in mortgage on the land value and rates together. It would be paid partly in Rates Vouchers and partly in NZ dollars, (the rate to be determined, being aware that to pay the NZ dollar component becomes progressively harder over time). In effect the Council gradually buys up the land but the guardianship and responsibility remains with the owner and the title is burdened. The Land Levy is ongoing. It is not a mortgage that eventually gets paid off.

Land Rental Index Would the payment be linked to inflation?

No. Inflation is linked to interest rates, which assume a one-size-fits-all situation for the whole country. Land isn’t like that. Some sites are more desirable than others. The payment would be linked to a Land Rental Index. This is an index of averaged land rental values for a geographical zone over time. Land rental values are much more stable over time than are interest rates.

Be clear this isn’t a land price index. Speculation in land drives prices up but doesn’t drive rentals up. It is the rental value that is important. And as land prices come down, the rentals remain much the same. Land keeps its intrinsic value over time.

So what is a land rental value? It is the value of the weekly rent on the property less the cost of the improvements expressed as a weekly figure. See what landlords are charging, subtract out the costs of improvements. Then you have got a land rental value for that property. I rent it for $600 a week and it has a building worth $200 a week then the land is worth $400 a week. Do this calculation of land rentals or a convenient sample and then take the average change year on year. The value of the improvements goes up when it there is investment in improvements.

Because it is an index of the land rental value over time, it doesn’t vary much. Only sudden catastrophic events like land subsidence or an earthquake will change the land rental value dramatically. It could drop away to zero. When a major new service like a rail link arrives, the land rental rises. So you pay what it is worth….

…Wouldn’t the Council then own the land?

No. The fact that the contract gave money up to the value of the land does not change the ownership of the land, but the required Land Levy is included in the title as an encumbrance – a big one. It would be enough to drop the price of the property dramatically and make it more affordable. Because the encumbrance is on the title, the ‘owner’ then effectively becomes the guardian of the land or ‘kaitiaki o whenua’, as it should be. The owners are fully responsible for what happens there.

This is an opt-in scheme where would-be homebuyers can contract with local government to covenant their land with a financial obligation, an agreement to pay a regular sum to council in exchange for the Council giving them a lump sum to pay for their land. At this stage the Council is exempting them from all land related like rates and other charges. The sum paid will be negotiated case by case according to legislative guidelines and be, say, the amount they would have paid in mortgage interest on the land together with the rates, minus say 10-15% or it may be up to 20%, depending on the land use.

Legislation may be required. This scheme would require legislation to amend the Land Transfer Act to clarify or reintroduce a provision for a ‘rentcharge’ in a ‘Memorandum of Encumbrance against the Title’. This has been used in the past, with perpetual rentcharges. There will also be legislation needed to specify what purchasers could expect from councils and what land levy must be paid. A land index must be created in law. The penalties for noncompliance must be spelt out in law. The Reserve Bank Act will also have to be amended to allow for local currencies and for the establishment of a bank dealing in local authority currencies. There are possibly other Acts that may require amending like the Securities Act and the Local Government Act.

So what is a covenant?

There is a provision in property law that allows land to be covenanted, or subject to a solemn promise. It is an agreement often between adjoining landowners to do something (affirmative covenant) or to refrain from doing something (restrictive covenant) with relation to the land. An example of an affirmative covenant is a promise to build a fence, while an example of a restrictive covenant is a promise not to develop land for commercial use. Each covenant has two sides: the burden and the benefit. The burden is the promissor’s duty to perform the promise and the benefit is the promissee’s right to enforce the promise. These covenants ‘run with the land’, which means that subsequent owners of that land must honour the covenant. The title becomes burdened.

How will a Rates Voucher work?

The Rates Voucher is a promise by the local government to accept the note for the payment of rates. If it were a note the Mayor and Treasurer would sign it. This is done interest-free at almost zero cost to local government. On the note would be printed the words “This note is valid for the payment of rates to Wellington City Council” or something similar. And ultimately they must be acceptable for the payment of rates.

The incentive for circulation is dealt with not by a negative interest rate, but by making the note redeemable on a certain fixed date. This will be further explained later.

But how would you guard against inflation or deflation of the currency?

If there is too much local currency in circulation it will become gradually less trusted. People will go back to the national dollar. The rationale for having a local currency backed by a promise to accept it for rates is to create the conditions for people to trust it and accept it. Therefore there has to be careful management of the amount of currency in circulation. Since councils have to buy petrol, machinery and other things that can only be bought using national currency, each council would have to decide what proportion of the rates bill would be billed in the local currency. It may be 33% for instance. If there are too many local dollars out there, the council will not be able to accept them all.

So how would it work out? A council that collects $120 million in rates a year might issue just $40 million in local currency annually and these would be issued with an expiry date. The object is to design it to be a ‘use it or lose it’ currency, just like Flybuys or the tickets you buy for a concert or a game of rugby or a plane trip. If you don’t present your ticket on that date, it is no good trying to present it once the concert, rugby game or plane trip has been and gone. Because they know the size of their rates take, each council knows how much to issue….

…Example 1

A couple in Otaki wanted to buy a section for $127,000. The rates on the land are $800 a year. If they were to get a mortgage of $127,000 at 6.9% they would have to pay $8723 a year in interest. The total land associated outgoings would be $9723 a year. The couple then enters into a contract with the council to receive the $127,000 they needed in Rates Vouchers, and in exchange there are no further rates obligations. But in the covenant they agree to pay Council, say, $8094 a year from then on. The council could charge them for water and sewerage.

Suppose they then spent $450,000 building a house. The price of their house when they came to sell it would represent anything they put into it less depreciation.

…Effect on house prices

The covenanted properties, being financially ‘burdened’, would then have a very much lower market value. With dropping house prices this arrangement would benefit would-be first homebuyers. According to the Productivity Commission (Dec 2011) land values are typically 60% for most Auckland, North Shore and Queenstown homes and even more for older homes in big cities, so the covenanting process would actually drop the price of the property by a whopping 60%.

But the landowner would in exchange be relieved from all land related taxes – rates. And very soon, when the local government issues a Citizen’s Dividend, landowners would get other financial benefits (more about Citizens Dividend later). While the property value would drop dramatically, the landowner would still have the same or slightly more equity and so would not be disadvantaged. In fact they could be considerably advantaged, because there is a larger market in the group of buyers for cheaper properties.

This paper is advocating a switch to Land Levies on a plot-by-plot basis, exchanging the new levy for removal of the old burdens. The country can then move gradually and smoothly to a fairer system. It does this by the accumulated benefits of a growing number of individual actions.

Summary

We can stabilise land values, reduce our indebtedness, make banks safer, help small and medium sized businesses, even out rises and falls in property prices, help prevent inflation or deflation, move to a low carbon economy, make it much easier for people to buy their first home, and reduce poverty – all by the same simple action repeated thousands of times. Moreover we have now maximised the chance for resilience in the face of threat by moving away from a monopoly currency which, together with poor tax policies, has caused so many monetary, sovereign debt and bank crises. The local authority solution is easiest because local authorities already have their revenue tied to property value. This moves it to revenue tied to land rental value. Several birds are killed with one stone. The monetary and land issues are all dealt with together and the bonus is more wealth equality and a genuine start to environmental healing. If appropriate engagement of Maori is managed so that they trust councils more, local authorities that adopt this policy will be oases of prosperity and happiness in a time of high unemployment and misery.

Author

Deirdre Kent April, 2012, Otaki, New Zealand ph 06 364 7779 or 021 728 852. She has been in and out of green politics since the Values Party in 1975. The author of Healthy Money Healthy Planet – Developing Sustainability through New Money Systems, 2005, she co-founded and worked for Otaki Transition Town and Otaki Timebank. In late 2011 she co-founded the New Economics Party http://neweconomics.net.nz and wrote its website.

All comments, suggestions, information please contact the author at deirdrekent@me.com. Her ideas are developed from conversations with Adrian Wrigley of http://systemicfiscalreform.com to whom she is deeply indebted. The two paragraphs on Maori have been written by Catherine Davis.

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