Saturday, 3 January 2015

Homey homies (2): The effect of congestion on rental values

The Stigler looked at an article on gentrification a few days ago.

Apart from illustrating that society as a whole creates rental values by imposing/accepting law and order, this bit is a good illustration of von Thünen's theory of rent:

Key to attracting companies and families is Compton's geographical location close to LAX airport, Long Beach port which is the second busiest container port in the US, and near office buildings in downtown Los Angeles.

[Mayor Mrs Aja Brown] said: "In California they're not making any more land. And with the high cost of land, from a business standpoint, being able to move your goods quickly and cheaply makes Compton an attractive place to be.

"And traffic is so horrible here in Los Angeles, and getting worse, that if you want to have a quality of life not on the freeway, you may want to live nearer where you work. I think people are getting to grips with that. I think Compton is a really attractive place for young families."

We can hold some of von Thünen's variables constant; what has changed is

a) The value of being close to the centre of activity has gone up,

b) Hence the amount of traffic has gone up,

c) So although Compton's physical distance from the centre has not changed, travel times/travel costs have changed.

Assuming that the overall attractiveness of the whole area is roughly constant (more people makes the centre more valuable but more traffic pushes rents down again), what happens is that rental values close to the centre increase disproportionately and rental values further out go down slightly.

This is true even if travel times from Compton have gone up in absolute terms; as long as travel times have gone up even more for people commuting from further afield.

(Rhetorical questions: Can any single landowner in Compton claim to have created or earned that extra value and/or can any single landowner in surrounded areas be blamed for the fact that the rental value of his land has fallen?)


Rich Tee said...

I remember when I was studying years ago I came across a theory that inner city areas are often rundown because land/property owners are simply waiting for the value of their land/property to rise as the city expands so they can sell it, so they don't make any investment in their land/property.

This seems to have been proved true over time in many cases, as inner city areas have changed from being rough and rundown in the 1970s/1980s into desirable areas (eg. East End of London, Compton, most city centres now).

Do they benefit from government noticing the plight of inner city areas and feeling obliged to do something about it? eg. improve transport, crime prevention, investment in new public buildings?

Mark Wadsworth said...

RT, good point and good question.

A lot of the time but not always, it happens that the government says "This area is a bit run down and there are lots of poor people there. So we should rejuvenate this area by spending taxpayers' money on X, Y and Z."

The flawed assumption is that the rejuvenation will benefit the poor people living there.

Even assuming the rejuvenation is a success, all that happens is that the area becomes more desirable, better off people move in, the poor people are moved out to elsewhere and the landowners are laughing all the way to the bank.

Which is yet another argument for funding this sort of thing with LVT on the area which is to benefit (see also: Business Improvement Districts)