Putting figures on land value’s transport funding potential

Cross-posted from my article at The Conversation

Value capture actually can work when it comes to funding new transport infrastructure. My research on the Gold Coast light rail provides the figures to demonstrate the size of the gains to nearby land values, which were around 25% of the A$1.2 billion capital cost in stage one of the project.

Value capture is the idea that new transport infrastructure can be financed, or at least partly, by increases in land value around the project. It’s something Prime Minister Malcolm Turnbull has promoted and industry experts have come out in support of, but the proof has so far been elusive.

To shed some light on the potential scale of such property value gains, I studied the changes in Gold Coast land values following the opening of the light rail project in July 2014.

Why land values?

The case for this type of “beneficiary pays” view is a moral one more than an economic one. The moral case is that publicly funded transport projects should not be undertaken for the benefit of a select group of landowners.

For example, we know that the planning system is susceptible to favouritism because it gives windfall gains to landowners. The same holds for transport investments. Thus, there is a fairness argument for taxing these “unearned” gains to fund the transport investment that caused them.

number of recent articles at The Conversation have described some of the options for translating land value gains into a revenue source.

But while we know that transport investments typically increase land values in areas that become more accessible, does a new rail line increase land values by 5%, or 50%? Taken together, what proportion of the transport investment costs can be funded by these gains? Are they 10%, or even perhaps 100%?

Who benefits, and by how much?

To answer the question of how large land values gains are, I used the full suite of statutory land valuations data available in the Gold Coast to tease out the land value variation over time at different distances from the light rail stations. By doing this I could see the path of relative land values for properties within 100 metres of the stations, between 100 and 200m, and so forth, up to 2 kilometres.

I found that land within 400m of the stations increased in value by 7% more than land between 400m and 2km from the stations in the year after the light rail began operation. This is in keeping with the results of some previous international studies.

By applying the price deviation to the total value of land in those areas (a little over A$4.2 billion in 2015), I could then estimate that the absolute change in land value was A$300 million. This is the once-off gain to the owners of the 1,324 plots of land within 400m of the light rail stations as a result of this transport investment.

This estimated value gain is net of additional rates and charges that arise automatically from increasing land values. It is also net of the additional charge levied citywide to help fund transport investment in the city.

How much funding can value capture deliver?

At a 5% market interest rate, those capital gains are equivalent to an annual revenue stream of A$15 million. This is the total possible revenue from a funding system that perfectly captured all land value gains.

However, state governments already levy taxes on land values, though in Queensland there are many exemptions, including for land holdings under A$600,000 in value. After this, the marginal rate is between 1% and 1.75%.

It is possible to estimate the additional revenue available to the state government from land value gains due to this investment in the hypothetical situation where there are no exemptions. At a 1% land value tax rate, this would be an automatic increase of approximately A$2.5 million in annual land tax income from the value gains due to the light rail. At a 1.75% rate with no exceptions, the revenue would be A$3.9 million per year.

Overall, the land value gains from the Gold Coast light rail were around 25% of the capital cost. One of the simplest ways to capture these land value gains is to expand the existing state land tax system to remove exemptions. That would automatically capture 17-26% of the potential revenue from the value gains.

Comments

  1. Really good to have some numbers on this stuff. Mind you the process of Land valuation is a very strange and unpredictable beast.

  2. Jumping jack flash

    Sounds simple to me. Adding infrastructure increases land values. Makes sense. You see it happening in Sydney all the time along the rail corridors.

    But, something that has always fascinated me in this whole scheme is, how do the people building the infrastructure actually get paid with that increased land value?

    It is just a number trick, and the whole thing is actually taxpayer funded?

    Or is equity actually extracted? And if so, who is responsible for the new debt? The developer who bought the land at unimproved value? Or those that benefit from the increased land value, ie, the surrounding businesses and residents, sort of like a quasi body corporate?

    • Jumping jack flash

      Ah, rates and levies.

      So, taxpayer/ratepayer funded.

      Makes sense now, as to why high speed rail will never take off. If they tried to suddenly get all those hillbillies in the towns the high speed rail goes through to suddenly pay more rates, or add levies, they’d just move further away from the rail line.

  3. Good stuff. The value capture approach is a bit of a red herring in my view. It has often been used or entertained in circumstances where some exotic financing arrangement is in play, but it is one of those common instances where the more complex a scheme, the greater the costs, and the benefits are more likely to flow to financiers and assorted ticket clippers rather than the public.
    A basic site value charge is simple and low cost to administer. But, and it is a big but, the quality of valuations from state to state are pretty mixed. Different valuation cycles and approaches by law have created a messy landscape. To move to any expanded land tax based funding, including value capture would require a fair bit of work on the valuation front by all states.

    • Almost, Leighton. The problem is not the valuations, it is their frequency. Victoria conducts biennial valuations for council rates. It would be easy to interpolate the odd years and derive quite useful and accurate yearly valuations.

      This is most important when land prices are falling (soon, soon) so land tax’s automatic stabiliser function works properly – retreating in lockstep with price falls.

      • Agree that Victoria’s biennial valuations are probably the best – more so since water rights are stripped out since 2006. Other states have some bigger problems, with approaches to SV and CIV varying a little, especially in commercial circumstances.
        That being said, all states have clear appeal mechanisms, so if you don’t like a valuation, it can be challenged. In practice, most valuers tend to undershoot a little, especially in a rising market, lessening the impulse to challenge valuations. This might change as things go south.

  4. Using value capture has to be an improvement on the status quo. And yet an underlying problem still exists, which is that our Plans wish for potential ridership, and trip attractors, to be “priced in” to those locations. That is, we want such an increase in the supply of floor space, that the floor space becomes more affordable as a result.

    This is the whole basis of central planning that assumes that constraining the outwards growth of a city, and investing in fixed-route public transport, and upzoning, will enable housing supply sufficient to ensure affordability, along with reducing automobile use. Affordability being what we took for grated for decades of largely automobile based growth. But it is not working this way in practice, is it? The main reason that the most insightful economists have identified, is the respective role of land value inflation and ROI in actual development, in incentives to investors. Grimes and Aitken (2010) conclude that the planners and economists standard models for housing supply always fail to predict a collapse in supply as the result of the aforementioned approach, which happens because “all the profit potential from redevelopment is impounded in rising land values”. Simply sitting on the sites and indeed buying more, is more attractive to investors, than cashing out or investing in a redevelopment to provide more floor space. Developers themselves who rely on construction for their incomes, must bid against investors for sites, carry far higher costs through the development, and make slimmer margins in the final wash-up.

    The behaviour of the owners of sites associated with Light rail and other fixed-route PT investments, is little different. In Portland, Oregon, sites have remained undeveloped for decades and a lot of the Planners desired redevelopments have only finally occurred with the desperate tactic of payment of fat use-it-or-lose-it subsidies to the site owners. Light rail in Portland has been a disastrous black hole of wealth transfers and dead-weight losses, that the city would have been far better off without. Existing bus services have had to be axed all over the place to try and balance the books, with PT ridership in the overall, dropping at the same time as costs blow out.

    The problem with value capture under these circumstances, is that either it is just a bothersome charge against unearned capital gains that the investors “cost in” and keep doing the same old same old anyway; or its rate has to be so high that (as happened in the UK from 1947 to 1952 re zoned fringe land supply) it simply brings the property market in those locations to a grinding halt.

    Market-nudging mechanisms have be devised, that incentivise the site owners to get the cranes and concrete placers to work and get potential ridership and trip attractors moving in en mass – which means “pricing them in”, in contrast to the “pricing them out” that is the effect of ALL approaches thus far tried or even suggested as politically possible, in Anglo economies with traditional Anglo property rights intact, and a Centrally Planned land supply rationing system imposed.

    I am economically libertarian, but I challenge advocates of utopian “transit oriented” city planning to face the reality that compulsory acquisitions and heavy government involvement are the only way that their dreams are ever going to work. The Japanese system is the best model; the subway operators also own the sites served by their system, and regulations on their property operations result in profit being maximised by maximising the quantity of tenants and subway riders, rather than rent-gouging from a position of semi-monopoly advantage or simply sitting on unimproved sites. The effect of this, is actually to provide competitive anchoring to land values in the entire city.