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Expropriation Bill will kill the necessary business of land speculation
Expropriation Bill will kill
the necessary business of land speculation
The Expropriation Bill seeks to provide uniformity in expropriation procedures, as well as providing for the circumstances under which no compensation may be paid for any given expropriation of land.
By Mpiyakhe Dhlamini, Contributing Author to the Free Market Foundation
It is likely that the Bill will have to endure numerous challenges due to the likely economic impact if it becomes law. One serious concern arising from the Bill is that it seems to include an attempt to make land speculation illegal, or at least invalid. The Bill lists five conditions under which land may be expropriated without paying compensation. The list is not exhaustive, however, since the relevant section of the Bill says nil compensation will not be limited to those conditions. Land that is not being used and the owner’s main purpose is not to generate an income but rather to benefit from the appreciation of its value, is the first condition listed.
The first question this raises is how the government will determine the purpose of the land owner. Will the government have to read the mind of an owner? What if the owner is simply trying to raise capital in order to generate an income? Will the burden of proof be on the owner to prove that they are in fact trying to do this and are not a member of the speculating class? And what is it exactly about speculators (people
who buy an asset in order to benefit from price appreciation), that makes them deserving of government-authorised theft of their property?
The speculator has always been blamed for all sorts of things, usually where the government is the real culprit and seeks to hide their involvement. In 2008, American President Obama blamed greedy speculators for the global financial crisis that started during that year. This is despite the fact that the crisis was preceded by years of monetary manipulation in order to make credit artificially cheap, most prominently through the government institution of central banking.
This is part of a long history that we won’t go over here. Suffice to say, it has become entrenched in our collective psyche that the speculator adds no value, and this is reflected in the Expropriation Bill.
Yet it’s worth considering what role the speculator actually plays in a market, not only the market for land but in any market. Firstly, it must be noted that speculators take on risk, when a speculator buys land, they are taking on the risk that the price of that land will fall.
This implies that the speculator has to anticipate the demand/supply dynamics of the market they are in if they are to be successful. Therefore, successful speculators speed up the adjustment of market prices to the equilibrium price, the bad (not in a moral sense but in a competency sense) speculator will lose money while the good speculator anticipates future demand, and therefore helps sellers avoid selling their land for far less than what it would be worth. A market without speculators is a market without a significant group of buyers for genuine sellers.
This practically means that prices are less volatile because of speculators. This can be illustrated with an example, say a farmer’s son wants to sell a parcel of land that the farmer valued at R100 and needs to sell this parcel quickly because they want to move into a different profession, but the highest offer from other farmers at the moment is R50 (perhaps it was a bad season and the farmers don’t have too much money at the moment), then the son has to take that price and starts his new life with much less capital than would otherwise be the case. The speculator would see this and perhaps bid R75 for the parcel of land, they have no interest in farming, they just know that they can sell the land later for R100.
Speculators provide liquidity in a market
Speculators therefore help provide liquidity in a market. Simply by aiming to profit from the price of an asset, they ensure that the asset (land in this case) always has a buyer at reasonable prices for all sellers and provides the asset for those who need it, also at reasonable prices. Speculators don’t fall in love with assets, they sell when a buyer is willing to meet their target price. Therefore, the market is able to clear, speculators help market participants avoid shortages (which drive up prices) and excess supply (which drives down prices) allowing the market to clear closer to the “equilibrium” price.
The Expropriation Bill if it becomes law will kill the business of land speculation, and therefore the services provided by the speculator in assuming risk, allowing the market to adjust to the equilibrium price quicker and providing liquidity to our land market. Without these services we will have a much more inefficient land market. This is apart from the other negative effects of the Bill, including that it will depress property prices in the country as well as overall economic growth, and will therefore delay the absorption of our large numbers of unemployed into the job market, especially so in land-intensive industries like farming.
