Thursday, 5 September 2013

Real life thought experiment

Via The Daily Mail, from The Wall Street Journal:

IRUNA, Sweden–It is a tough slog trying to relocate an entire city—just ask the people of this Swedish mining town dozens of miles above the Arctic Circle.

For the Kiruna municipality, the process started in 2004 when it received an unassuming one-page letter from the state-controlled mining company Luossavaara-Kiirunavaara AB, or LKAB... fissures in the ground are creeping ever closer to the center of Kiruna, and some residents of this city of 18,000 may soon start packing their bags.

In March, Stockholm-based architectural firm White arkitekter AB won a competition with its proposal of a master plan for a new city shifted about two miles to the east, dubbed "Kiruna 4-ever."

We know what will happen to land values. They will fall back to zero in the area now occupied by the old city and will rise by an equal and opposite amount in the area occupied by the new city.

LKAB, which has agreed to pay the bulk of the tab, says it is impossible to estimate the full cost of the project. But it has dished out 3.5 billion kronor ($532 million) to date and set aside an additional SEK7.5 billion for the remaining transformation.

That works out at about £50,000 per resident, which seems about right for the cost of new roads, new buildings, new utility connections etc.

The biggest cost uncertainty relates to property values. Under the current plan, owners of real estate that needs to be demolished will have the value of their properties assessed independently. LKAB will pay them with a 25% premium added.


That's money down the Homey toilet, isn't it? If the proposed new site is privately owned, then no doubt he will extort a huge price for that land, so landowners will end up collecting twice.

The only reason why land values are going to fall is because of de-population. If 99% of the population spontaneously decided to move away, then land values would plummet as well (as has now happened in Detroit), and who would the local land owners claim their money from? Would they sue people for having left?

For sure, in this instance there is an identifiable third party, LKAB, who has caused physical damage to buildings (which are the owner's capital and for which LKAB ought to rightly pay compensation), and that is what triggered the de-population, but if LKAB had instead promised to maintain and repair all buildings in the old city instead, there would be no de-population and little impact on land values.

The simple answer to this is to build an identical new town and to give each landowner from the old town the keys to the new version of his building in exchange for his old building. The entire population moves across and the land values go with them.

(Or just have Land Value Tax, of course).


Kj said...

I think Kiruna is where they moved a whole bunch of houses on the hoof because of mining disturbances.

Bayard said...

Yep, that's the big question, who owns the site of the new "city"? Perhaps it's LKAB, but it's more likely to be a friend of one of LKAB's directors.