The Economics of Empty Lots: How Policy Makes Vacancy Profitable

Why do cities with housing crises also have thousands of empty lots? The answer is, in part, land speculation. But speculation thrives because policy makes it profitable. Land speculation operates on a simple premise. Owners buy property, hold it vacant, and wait for appreciation to outpace ownership costs. If property taxes average 1% annually while land values rise between 3-5% per year (with land itself appreciating at 8% during certain periods), doing nothing becomes profitable and the owner pockets the difference.

This is not irrational behavior. Tax policy and zoning regulations create these incentives. When cities rezone neighborhoods for higher density or announce infrastructure investments, nearby land values can surge. Speculators who bought early and held patiently can see returns of 200-300% over a decade. Meanwhile, the surrounding community bears the cost. Empty lots produce no housing, no tax revenue, and no economic activity.

Speculation distorts housing markets by withholding supply precisely when demand peaks. When supply shrinks, prices rise faster, making speculation more profitable still. The cycle reinforces itself. Defenders of vacant land argue that owners have legitimate reasons to wait: assembling larger parcels for development, waiting for permits, or timing the market for optimal construction costs. These explanations hold water in specific cases but fail to account for the scale of the problem. Oakland reports approximately 4,000 vacant parcels remain scattered throughout the city, with many sitting idle for years. That duration suggests strategic withholding.

Most jurisdictions tax land and buildings together at the same rate, creating perverse incentives. An owner pays the same tax rate whether the lot sits empty or holds a six-story apartment building. Construction costs money while vacancy costs almost nothing. Rational economic actors choose vacancy whenever expected appreciation exceeds development returns. Cities have deployed various tools to combat speculation but results have been uneven. The evidence suggests that no single intervention solves the problem, but some combinations show promise.

Vacancy taxes impose penalties on unused property. Vancouver introduced a 1% levy on vacant homes in 2017, later raised to 3%. The tax brought in C$88 million but one analyst calculated it reduced vacancies by just 0.19% of rental stock. The tax works well as a revenue mechanism but its ability to impact supply is less clear. Similar programs in Melbourne and Washington, D.C. have produced modest results, suggesting that vacancy taxes of this size can nudge behavior at the margins but cannot fundamentally alter market dynamics.

Land value taxation splits property taxes into separate levies on land and improvements. Theory holds that taxing land at higher rates than buildings discourages speculation while rewarding development. Pennsylvania experimented with this approach in several cities during the 1980s and 1990s. Results varied by city. Harrisburg saw vacant structures decline from over 4,200 in 1982 to under 500 by 2001. Allentown saw building permits increase 32% in four years.

Land speculation carries environmental consequences beyond housing markets. Infill development on vacant urban parcels reduces sprawl and shortens commute distances. When speculation keeps infill sites empty, development pressure shifts to greenfield sites on urban peripheries. This pattern consumes agricultural land, fragments habitats, and locks in car-dependent lifestyles for decades.

Anti-speculation policies carry their own hazards too. When cities crack down on vacant lots, property owners may rush to develop, triggering a cascade of rapid neighborhood change. Lower-income residents could face displacement as new construction attracts higher-income households and drives up surrounding rents. Effective policy must pair anti-speculation measures with strong tenant protections, affordable housing production, and community land trusts that permanently remove parcels from speculative markets.

Cities that have made meaningful progress in combatting land speculation combine multiple tools: vacancy penalties to discourage hoarding, streamlined permitting to reduce development friction, inclusionary zoning to ensure affordability, and land banking to acquire strategic parcels for public development.

Montgomery County, Maryland offers a useful model. The county established a Housing Opportunities Commission with power to purchase land, finance development, and maintain permanent affordability. The county recently created a $50 million fund to provide low-interest interim loans supporting affordable housing acquisition. Combined with policies mandating affordable units in new development, the county has produced thousands of below-market units. The key was creating an institutional alternative to private speculation rather than merely penalizing it. Tokyo provides an international comparison. National zoning policies permit development by-right in most locations, this has kept land speculation minimal. Tokyo has tripled its housing stock since 1963, growing roughly 2% annually, while home prices remained stable despite population growth. The city routinely builds more housing than all of California, despite having a comparable population.

Addressing land speculation requires acknowledging an uncomfortable truth. The practice is not aberrant behavior by bad actors. It is rational response to policy incentives. As long as holding vacant land produces better returns than developing it, speculation will continue. Meaningful reform must shift those incentives. Higher carrying costs for vacant parcels through targeted taxation. Lower barriers to construction through streamlined approvals. Alternative pathways to development through public land banking and community ownership models. The politics prove difficult. Property owners resist tax increases. Neighbors oppose new construction. Municipal budgets cannot absorb the costs of aggressive land acquisition. Yet the cost of inaction accumulates daily. Housing shortages, displacement, sprawl, and forgone economic activity mount.

Modest interventions that marginally increase the cost of vacancy or modestly reduce the barriers to construction can shift behavior at the edges of the market. Over time, these shifts compound. Lots that once sat empty for years might sit empty for months. The empty lot down the street is the physical manifestation of policy choices prioritizing patient capital over urgent housing needs. Changing those choices requires technical competence, political will, and patient coalition-building.