Unearned increment refers to the increase in the value of real estate that happens without the direct effort, investment, or improvement by the property owner. This phenomenon is primarily attributed to external factors such as population growth, infrastructural developments, changes in zoning laws, or general economic growth in the area.
Causes of Unearned Increment
Population Growth
One of the primary drivers of unearned increment is population growth. As more people move into an area, the demand for housing increases, pushing property values higher.
Economic Development
Economic developments, such as the establishment of new businesses, shopping centers, or industrial parks, can also contribute to rising property values in the nearby area.
Infrastructure Improvement
Government or private investments in infrastructure such as roads, public transportation, and utilities often lead to increases in property values.
Zoning Changes
Modifications in zoning laws that allow for higher-density housing or commercial use can significantly increase property values.
Types of Increment
- Speculative Increment: This type of increment is expected by investors or property owners based on projected future developments and growth.
- Actual Increment: This type represents the real, observed increase in property value due to the described external factors.
Historical Context
The concept of unearned increment was notably discussed by economists like John Stuart Mill and Alfred Marshall. It was further popularized by Henry George, who argued for the “single tax” on land to capture this unearned increment for public use.
Examples
Example 1: Urban Development
A rural area near a growing city experiences an unearned increment in property values as the city expands. The construction of a new highway reduces travel time to the city, making the rural area more attractive for residential development.
Example 2: Gentrification
A neglected urban neighborhood might experience an unearned increment as it undergoes gentrification. New businesses, better public services, and higher-income residents contribute to a rise in property values.
Applicability in Modern Economics
Unearned increment has significant implications for urban planning, property taxes, and public policy. Policymakers often consider capturing some of this “unearned” value increase through special taxes or development fees to fund public projects.
Comparisons
- Earned Increment: Resulting directly from the investments and improvements made by the property owner.
- Capital Gains: Increases in asset value realized upon sale, which may include earned and unearned increments.
Related Terms
- Capital Appreciation: Increase in the value of an asset over time.
- Gentrification: Process where urban neighborhoods see increased property values and demographic shifts.
- Land Value Tax: A tax on the value of land, without regard to buildings or improvements on it.
FAQs
Is unearned increment taxable?
How can one benefit from unearned increment?
How do government policies influence unearned increment?
References
- George, Henry. “Progress and Poverty.” Applewood Books, 1879.
- Marshall, Alfred. “Principles of Economics.” Macmillan, 1890.
- Mill, John Stuart. “Principles of Political Economy.” Longmans, Green, and Co., 1848.
Summary
Unearned increment is a key concept in real estate economics, describing the appreciation of property value caused by external factors rather than the property owner’s efforts. Understanding this concept helps in making informed decisions regarding property investment and public policy, with significant implications for urban development and economic planning.
