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March 20, 2002

Book Review - Don Riley "Taken for a Ride"

Don Riley is a commercial landlord operating in London. Shortly after the Jubilee Line Extension (JLE) was completed he noticed something: property prices in his stomping ground of Southwark were going up. "Very nice" he thought - especially as he hadn't had to pay a penny for the privilege.

It is no great surprise that railways, or other pieces of transport infrastructure, increase the value of nearby property - imagine (assuming you live in London) how much your house would be worth if the local station suddenly disappeared. Private railways in Japan have for many years built shopping centres, resorts and whole towns near their lines. What Don Riley decided to do was to see if he could quantify it.

So, he set off on his bike, property newspaper in hand and reached a remarkable conclusion: the £3.5bn invested in the JLE by taxpayers had benefited well-heeled Rackmanites like himself to the tune of £13.5bn.

The consensus view is that although we might all want nice, fast, cheap rail services there is simply no way they will ever pay. London Underground will certainly never see more than a fraction of its £3.5bn. Riley's research turns that consensus on its head. Railways pay all right - just for different people.

There was one factor that Riley did not take into account - property price inflation (not insignificant in London in the late 1990s.) I have done a back of an envelope calculation on this and my conclusion was that even had inflation been as high as 100% over the period the gain would still have been about £7bn - still highly profitable.

The question is how to make this effect work for infrastructure. When offered a return of £3 for every £1 put in there can be few landlords who wouldn't respond positively But they won't respond if they know they can put in absolutely nothing and still get the £3. Such a free-rider effect encourages some to propose some sort of hypothecated infrastructure tax. Ideas like this make my heart sink. We know that the State is not very good at running things. What is less well known is that it isn't very good at procuring them.

[Actually, with the cost overruns on the West Coast Mainline, the Channel Tunnel Rail Link and the Public Private Partnership on the Tube we are rapidly getting all too familiar with this idea.]

So, is there a way of cutting both the State and the free-rider effect out of the equation? I think so. This is how I think CrossRail could be funded:

CrossRail sells shares to property developers
CrossRail builds CrossRail
CrossRail issues vouchers to shareholders
These vouchers entitle the bearer to CrossRail tickets (at a marginal rate)
Shareholders issue these vouchers to tenants who in turn issue them to employees.

At a stroke we have eliminated both the State and the free-rider effect.

Don Riley "Taken for a Ride", Centre for Land Policy Studies, London, 2001.

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Comments

There was a case in the US when the elevated railway system was being built in New York and a landlord sued the railway for compensation because, although the value of his land went up as it was built next door, it would have gone up even more if the railway had been built one block away. Which showed a remarkable amount of check.

Of course the case was dismissed, but this increase in house prices due to better public transport links has been known about for a while.

Can't remember where I read this, possibly Richard Posner's work on regulatory takings.

Tracy

Posted by Tracy on June 27, 2004

Why should the public purse not capture the increase in property values which it creates? Otherwise the taxpayer will be handing money to the landowners for doing nothing! I am distinguishing the land value from the development on it. I am all for reducing taxes on development and improvements, but public (i.e. taxpayers) investment increases land values around it. I think taxpayers are entitled to a share of the value which it has created.

Take, for example the proposed extension to the Manchester Metrolink. The development was cancelled on the grounds that costs have escalated from £200 million in 2000 to £580 million today. However, much of the increase is down to the colossal increases in Manchester property prices, (considerably above the national increase) which have been the direct consequence of the regeneration projects financed from the public purse. Thus taxpayers’ investment has increased the price of property, which the taxpayer must now pay in order to purchase the land for the metro link extension! Where the taxpayer has sown, the private land owner has reaped, and the taxpayer must pay again. This is scandalous.

Alastair Darling stated the metrolink ‘ would be the foundation of a million pound-a-day boom’. This boom will increase investment, jobs and incomes and further escalate property values. If only a small fraction of the increase in land values were recaptured for the public purse, the extension would be self financing. This is best achieved by introducing taxes on land values.

Posted by Peter Reilly on July 27, 2004

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