Activity in construction
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Real Estate Watch
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Land use planning and Economy
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Introduction
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Intervention or market
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In the last thirty years, there have been three reforms in land legislation: the Act of 1976, the amended text of 1992 and the 1998 Act on valuations. The first two were promulgated after some years of sharp revaluations in real estate with diminishing demand and their main purpose was to "put an end to speculation over land". They were both characterized by being relatively restrictive and gave local governments the powers required for intense intervention in the land market. The 1998 Act was born in a different context, after some years of falling prices and at a time of increasing demand. This Act was less restrictive and simply established common criteria in respect of planning valuations, leaving the local administrations to decide on the peculiarities of urban development. In the eight years this Act has been in force, a total of nearly 5 million houses have been started in Spain, a figure equivalent to 80% of the housing starts in the twenty years the two previous acts have been in force. If this Act had been more restrictive and prevented real estate development, the intense demand for properties would have pushed prices up much more in these past few years.
Although the three laws have permitted some development in market forces and have made it possible to transform some rustic land into urban land, none of them can claim to having completely stabilized housing prices.
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Urban land is an economic asset that can be used for different purposes and, consequently, a mechanism must exist to assign uses and densities in the most efficient way possible to raise the frontier of society's well-being to a maximum. The market may be left to do this or intervention or a mixture of the two may be chosen. It is a political decision that society must take in its different spheres.
Public intervention in the land market exists in one form or another in all the developed countries in the world and in nearly all semi-developed countries. In Spain, there is strong intervention in the land market and the legal framework makes it difficult for market forces to come into play.
Bases for intervention
If we define a competitive market as one where:
a. There is a large number of buyers and sellers.
b. Factors mobility is possible.
c. The product is homogeneous.
d. The players have sufficient information,
then, it can be said that the land market is typically uncompetitive because some of the conditions mentioned are frequently not fulfilled. It is clear that the characteristics related to the land asset (such as location, irremovability, etc.) affect the functioning of its own market, where these characteristics are the origin and justification of public intervention to regulate the said market. Broadly speaking, it has been said that the open market is not an efficient system for determining the best spatial location that economic activities demand and thus, administrative intervention is necessary. The basic argument is that administrative intervention would prevent the "failures" that occur in the market. These "market failures" can be grouped into the following categories:
- The existence of externalities associated with our actions on land means that considerable differences arise between the valuation of the costs and benefits made by the private and public sectors. In many cases, interventions in land (for example, the creation of a road or a green area) imply the existence of both positive and negative externalities, which are difficult to quantify and are not generally reflected in prices. Consequently, the market, which uses prices as a decision-taking mechanism, would not be efficient for the location of activities.
- Some interventions in land and some real estate assets have the characteristics of a public asset (sewerage network, parks, libraries) and, thus, the market is not the most efficient system to provide these because of the difficulty of establishing a price that reflects the fact it is a community asset. The market mechanism does not allocate public assets adequately, while administrative intervention, at any of its levels, can establish a level of allocation of public assets that is satisfactory to everyone. The provision of public assets justifies a certain degree of administrative intervention.
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