Bitcoin, Land Value Taxation, & US Real Estate Affordabilty

The US residential real estate market is hot, real hot. US home prices are at all-time highs with the Case-Sheller US National Home Price Index over 20% higher than the 2006 peak [1]. The market is fueled by all-time low mortgage rates [2], low-supply of new homes [3], and COVID-19 driving shifts in the market where people are moving all around the country to try and adapt to our new way of life [4]. This should be great, right? Existing home owners should be happy they can get a great price if they want to sell. What's the problem?

What happens if you don't already have skin in the game? The rift between the have and have nots is growing even larger. Entire generations of home buyers are being priced out of the market even at all-time low mortgage rates [5]. People are going to be permanently closed off from affordable housing. What can be done where housing is just simply unaffordable for a lot of people? There are two potential forces that I believe can help alleviate market pressure: bitcoin and land value taxation.

Bitcoin

The world is starting to take notice of bitcoin like never before. Publicly traded companies are starting to add it to their balance sheets as treasury reserves [6]. Family offices are starting to diversify their portfolios and hedge funds want exposure [7]. Retail interest in bitcoin has never been higher [8]. But how does this impact the US residential real estate market? We should consider that in the near future, investors in real estate are going to start to diversify their portfolios and move assets into bitcoin away from real estate. Why would they do this?

Cost of Carry – Real Estate

The cost of carry refers to costs associated with the carrying value of an investment [9]. These costs can include financial costs, interest on loans, storage costs, taxes, etc. The cost of carry to buy and hold residential property can be expensive. Consider ever increasing property taxes [10], mortgage interest, broker fees, insurance, assessments, and maintenance. All of these costs eat away at your investment over time. Cash buyers are only saved from mortgage interest, but everything else still applies. The SALT deduction cap that was passed in 2017 adds more salt to the wound. Owners of real estate in high tax states used to be able to deduct property taxes from their federal tax bill, but now they are capped at $10,000 [11].

Cost of Carry – Bitcoin

The cost of carry on bitcoin is basically zero. Investors in bitcoin can buy bitcoin and self-custody for a one-time fixed cost. For example, buying a hardware wallet for $120 [12] and keeping your private keys. There are also more serious custodial solutions that charge some small percentage based on assets under management. Coinbase custody quotes 50bps annualized [13].

Growth Potential

Bitcoin has a much higher growth potential over real estate in the long-term. There are only 21 million coins that will ever exist and theoretically less than that according to some research [14]. While there is a fixed supply of land on earth, the housing supply is more elastic. It can change drastically over time. Zoning laws also have a big impact on the supply of housing. Take for example, many cities around the US are up zoning, or planning to, which allows for more dense residential development [15]. Why would you want to invest in an asset over the long term where it's value can be eroded due to loosening zoning laws and new development? This can't happen with bitcoin.

The bitcoin market is also quite new and small relative to other classes. There is still a lot of upside growth, where it seems that real estate is a bit too expensive [16].

Tax Policy – Land Value Taxation

A few years ago, I wrote a post titled the The Least Bad Tax. This post discussed the nuance between existing property taxes (land + improvements) and tax on the unimproved value of land. The American political economist Henry George wrote about it famously in his magnum opus, Progress and Poverty. The main objective of a land value tax is to curb the speculation of land prices by taxing the unimproved value of land. Land price speculation is where buyers buy land in hopes to make a profit. Almost all Americans (and foreign buyers) consider US real estate to be a great investment. In fact, buyers think the US real estate is such a good investment that they'll take out increasing levels of debt to fuel their speculation. Unfortunately, this has a massive downside: housing affordability. If a land value tax were to be introduced, the cost of carry of real estate ownership would increase, decreasing the returns on investment over time. In effect, a downward spiral of real estate prices would occur, encouraging investors to seek investment elsewhere.

Conclusion

The combination of investors seeking a store of value through bitcoin instead of US real estate and the introduction of a tax on the unimproved value of land is the one-two punch that the US needs to create affordable housing organically. As investors diversify their portfolios into bitcoin away from real estate over time, we'll start to see a decline in US housing prices. Then, perhaps, we can start to see the rift between the have vs. have nots disappear.

Sources

[1] December 2020 234.395 vs. August 2006 184.609 https://fred.stlouisfed.org/series/csushpinsa#0 [2] https://fred.stlouisfed.org/series/MORTGAGE30US [3] https://cdn.nar.realtor/sites/default/files/documents/ehs-01-2021-overview-2021-02-19.pdf [4] https://www.pewresearch.org/fact-tank/2020/07/06/about-a-fifth-of-u-s-adults-moved-due-to-covid-19-or-know-someone-who-did/ [5] https://www.midwestfamilylending.com/mortgage-news/18462/up-to-60-of-buyers-are-priced-out-of-current-home-market [6] https://www.bloomberg.com/news/articles/2021-02-08/tesla-trails-only-microstrategy-in-treasury-bitcoin-allocation [7] https://www.coindesk.com/family-offices-may-now-see-bitcoin-as-alternative-to-gold-jpmorgan-report [8] https://insidebitcoins.com/news/coinbase-users-top-35-million-as-exchange-continues-on-growth-pattern [9] https://www.investopedia.com/terms/c/costofcarry.asp [10] https://www.civicfed.org/civic-federation/blog/ten-year-trend-shows-increase-effective-property-tax-rates-cook-county [11] https://www.fool.com/millionacres/taxes/articles/potential-salt-deduction-changes-what-taxpayers-need-know/ [12] https://shop.ledger.com/products/ledger-nano-x/ [13] https://custody.coinbase.com/pricing [14] https://static1.squarespace.com/static/5d580747908cdc0001e6792d/t/5e98dde5558a587a09fac0cc/1587076583519/research+note+4.17.pdf [15] https://www.bloomberg.com/news/articles/2019-05-21/to-tackle-housing-inequality-try-upzoning [16] https://www.bloomberg.com/opinion/articles/2020-11-13/housing-market-s-p-e-ratio-is-in-the-stratosphere