When we build new infrastructure that connects places to useful destinations or opens up development opportunities, it lifts the value of properties in the surrounding areas. This is pretty intuitively sensible: Holding all else equal, most people would be willing to pay a bit more for the convenience of having, say, a fast and reliable public transport route nearby.
How and why does this happen? If you want to know a bit more about that, I suggest you read the research paper that I wrote on the topic (with my colleague Karl Baker) for a 2015 conference. But a more interesting question is: What should we do in response to this?
Many people have observed that uplifts in land value create a potential source of revenue to recoup some of the costs of infrastructure development. Intuitively, this seems fair: If a project benefits nearby landowners, then they should help pay for those benefits.
However, it’s also possible for value capture to be unfair if it’s not designed right. Let’s consider a hypothetical example. Say that the government announces that it will start building a light rail line immediately. People who own properties around the stations rejoice: their properties will now be worth more. Some of them choose to sell up before the project is completed, banking the expected property value gains.
Now assume that the government has decided that it needs more funding to complete the project. So it announces that it will levy a tax on property values around the planned stations to capture some of the uplift in land values. This comes as a surprise to the people who bought land in the area after the project was announced: They are being taxed on gains that accrued to the people they bought the land from!
As it happens, this isn’t a hypothetical example. Auckland is in fact considering building a new light rail line between the city centre and the airport. Auckland Council has announced its desire to build the project sooner, while the current government thinks it won’t be needed until the 2040s. And since there’s an election on, political parties have an incentive to announce that they’ll build the project, either sooner or later.
Interestingly, the Greens’ announcement announced that they would use value capture to help fund the project:
Transport spokeswoman Julie Anne Genter said her party would make the $2.3b rail line a project of national significance and would begin construction this year. It would partly be funded by recovering the increase in property values from neighbouring areas.
This is a good move. Setting clear expectations that value capture will be used to help fund projects means that the fairness problems I discussed above are much less likely to arise. Anybody who sells or buys in the area should be aware that they may be taxed a bit more to help pay for the project.
The current Minister of Transport also seemed to be on board with the value capture concept:
Transport Minister Simon Bridges said today that there was a possibility that light rail could be brought forward on the route. That was likely to depend on demand for train services.
“It could well be sooner rather than later, and I’m very open to that,” he told reporters at Parliament.
His Government had already proposed the sort of land value capture that the Greens were proposing, he said. It might also seek funding from the airport and from Mt Eden businesses along the rail line’s route.
“If we did a serious public transport project … there would be other parties that would benefit significantly from that. Around the world … they’ve looked at how they’ve managed to help fund the project through those sort of things.”
Making value capture work is undoubtedly politically and technically challenging. There are many potential points of failure, the first of which is that expectations about who will be asked to pay for what aren’t clearly set in advance. So it’s encouraging to see some in-principle agreement that value capture should be on the table for major new projects.
What do you think about the pitfalls and potential of value capture?