Property rights, very important for getting things done.* Without them you end up with a communist type of stasis where creative as a population may be, they just quit trying.
From Construction Physics:
This newsletter is mostly focused on the mechanics of construction - how the parts of a building go together. But construction is just one part of the overall real estate development process, and the way real estate development proceeds has a large impact on construction. So I thought it would be useful to try to understand the mechanics of real estate, particularly with regards to what’s involved in putting up a building on a piece of land.
Real Estate and Property Rights
It turns out that the mechanics of real estate are deeply weird.
Our normal intuitions about property are that when we buy something, we own it, and can more or less do anything we want with it. If I buy a table, I can put it in my dining room, put it in my garage, chop it into firewood, etc. But this obviously isn’t the case with real estate - if I buy a piece of land, especially one that’s anywhere near an urban area, there are a huge number of restrictions on what I’m allowed to build on it.
One way to think about it is that in real estate, property rights are diffuse. With normal property, the rights for what can be done with it are all assigned to the owner. But in real estate, the property rights get spread around in a number of different ways; purchasing a piece of land doesn’t grant you complete control over it.
Many of these rights lie with various government bodies. Building codes, land use rules, and zoning laws are all ways that the government gets to decide what can and can’t be built. And unlike with typical laws, where there’s often an implicit assumption that people will follow them, putting up a building almost always requires explicit permission. Obtaining a building permit requires submitting your set of plans to the local permitting body, and getting their sign off, and inspectors will occasionally be sent out to ensure it’s being built in an acceptable way.
Other property rights lie with nearby residents. Almost every jurisdiction in the country requires some form of public hearing as part of the approval process for projects above a certain size. These meetings let the public air any potential concerns about the project, and which the local jurisdiction can require the developer address before a permit will be granted.
Other potential holders of property rights can be homeowners associations (via covenants or deed restrictions), utility companies (via easements), transportation companies (via eminent domain), or banks (via liens as part of financing agreements).
In addition to being diffuse, real estate property rights are fluid - they can shift and change much more than with conventional property, often in unexpected ways [0]. Building codes and zoning may change over time, or a new city council may get voted into office with different ideas about how development should proceed. In extreme cases, such as for properties that straddle the borders between various permitting bodies, it can be unclear exactly what the property rights are and who has them. During the development of the Museum Towers in Boston, five different permitting bodies simultaneously claimed jurisdiction over the site (the permitting costs ended up being more than $8 million in 2021-adjusted dollars). The frequency of lawsuits over development (one New York developer stated that 30% of their deals end up in court) is in some sense a reflection that with real estate it’s often unclear exactly who is allowed to do what.
In some ways ownership over a piece of land is much more akin to having a controlling interest in a company, rather than owning a physical object [1]. Even if you’re the majority shareholder, getting anything done often requires getting other shareholders on board, and where the control actually lies is something of an open question.
Real Estate and Externalities
The property rights of real estate are distributed like this because unlike typical property, where the benefits and costs are assumed to accrue entirely to the owner, the value of land is almost entirely determined by what’s around it. Schools, parks, amenities, transit access, adjacency to the beach or the mountains all make a plot of land’s value go up. Retail space in a high traffic area is much more valuable than retail space in the middle of nowhere, and a house right on the beach is much more valuable than the same house 3 blocks away from it [2]. A polluting or noisy factory, on the other hand, might make the value of adjacent real estate go down.....
....MUCH MORE
*For more on this part of the discussion see pretty much anything by Peruvian development economist Hernando de Soto. The Thompson Reuters Foundation has a brief introduction:
Property rights for world's poor could unlock trillions in ...
