Rent the Payment for the Use of Land 1

price, prices, paid, value, basis, capitalization, return and net

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9. Capitalization of is the custom in England to speak Of the "annual" value of land, since land is more often rented than bought. The pur chaser of land estimates its value at twenty times the annual rent in one case, or twenty-five times that rent in another, according to the rate of capitalization.

He is interested in the land because it returns a rent and consequently gives the owner an income. The capitalization of the income may be higher than the in come really justifies, but this is due to the permanency of the land, the possibility of monopoly arising from its ownership, and certain elements of social prestige that carry considerable weight in older communities.

Necessarily, too, the rent paid and its capitaliza tion must express some of the disadvantages to which the land-owner must yield. Under normal condi tions, the market price of any piece of ground will ap proximately equal the capitalization of its net in come. Those who become land-owners must accept the burdens of abstinence, waiting and risk-taking; and on account of these disadvantages they capitalize the rent on the basis of a net return ; the price of the land is practically fixed in this way. A charge of taxes on land, reduced to a rate of interest per year, decreases the capitalized value of the land just so much as the return from the land is lowered as a conse quence. That is, the land-owner must receive the current rate of interest when be buys ; therefore, the heavier the tax the lower the valuation of the land, if its return does not compensate the prospective pur chaser for the taxes paid to the government.

It is a current opinion that the owner of buildings and land must receive 10 per cent of its value in rent .in order to secure a net income of 6 per cent. By this is meant that the cost of maintenance and in surance eat up the 4 per cent, and the remaining six is the return on the building cost and the price of the land. When the land is sold the seller capitalizes it on the basis of what he thinks it ought to yield an nually. On the other hand, the familiar rise in the value of land is due to the increased demand for the land and the ever-increasing expression of that de mand in terms of rent. The state has become much interested in this phenomenon; more and more- refer ences are constantly made to the wisdom of taxing the increasing values for its benefit. Certainly the capi talizing of such values means taking advantage of the results that come from a growing community.

10. Rent and price.—In the spring of every year the owners of farms are looking for tenants, and pros pective tenants are looking for farms to rent. A fre quent arrangement in the Northwest is to divide the _crop on the basis of one-half for each participant, the owner paying for the seed, furnishing the twine and paying one-half the threshing bill. On this basis, a farm of 320 acres might yield a rent of $2,000 if the prices were high and the crop good. It is to be noted, however, that when rent is paid in cash it varies with the market prices, and that as the prices go down the rent decreases. Where the tenant pays the rent in cash he is well off or badly off, according to the varia tions in the market prices for the products he pro duces.

In the cities there are great differences in rents. The stores on the main thorofares pay enormous rents, as compared with the smaller shops on the side streets.

The passer-by occasionally sees a sign in some of these small shops that reads in this way : "Our prices are less than those on the big streets. We pay less rent." This is seemingly a convincing argument that rent makes prices. The retailer utilizes his shop windows for the display of his goods; location and advertising advantages are coordinated as a consequence. His business, thrives just so far as he has been able to secure a location where the greatest possible number of customers pass. And if' the demand for the goods in the store grows materially, the landlord will be sure to ask for additional rent when the lease is renewed.

Such ordinary facts of ,everyday commercial life raise the question of the connection between rent and price. In the analysis of the expenses of production, the materials, wages and interest are included. In other words, the employers' outlays are the expenses of production. Is rent one of these expenses, and does it constitute one of the elements of price ? It should be kept in mind that the word rent, as it is used in this part of the discussion, is what may ordinarily be termed ground rent. Ricardo, whose early discus sions of rent have been regarded as fundamental, de clared : Corn is not high because a rent is paid, but a rent is paid because corn is high ; and it has been justly observed that no reduction would take place in the price of corn tho all the landlords should forego the whole of their rent.

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