Wednesday, May 14, 2008

LAND VALUES, NYC | Bill Vickrey Lives

Prof. Bill Vickrey
The Federal Reserve Bank of New York has performed a service in showing that CoStar data can be used to generate estimates of land value over time and across an area.

The study (in the April/May 2008 issue of Current Issues in Economics and Finance, 14:3) is built around a computation by three Fed staff members (Andrew Haughwout, James Orr and David Bedoll) of average land values per square foot in New York City, excluding Staten Island, and ten New Jersey counties.

The average land value rises sharply from $47/sf in 1999 to $89/sf in 2001, then falls back after 9/11 because of questions about NYC’s future as a place to live or work.

Recovery set in quickly in 2003, with land values rising to $104/sf and soaring to $366/sf in 2006. As theory would predict, prices are highest in mid-Manhattan and fall off as a property is more distant from the center.

The report is interesting on many levels:
- The care that CoStar shows in collecting and verifying data makes it a useful new source of information on commercial property values.
- Property values increase five-fold increase in property from the post-9/11 dip in 2002, a remarkable achievement for which Mayor Bloomberg deserves significant credit – property values are an excellent hedonic index of the desirability of living or working in a particular city. One would like to have comparable data from other cities to see NYC’s relative performance.
- The data show how changes in overall building values primarily reflect changes in the underlying land, since buildings themselves depreciate over time. As more data of this type become available, it will become easier to show that taxes on land (“site”) value are fairer and more efficient than taxes on buildings. Land values do not depreciate in value like buildings and increases in these values are, in the thinking of Henry George, “unearned rent” relating to population growth and are therefore especially appropriate as a tax target.
- Over time, site values can be expected to grow steadily and are therefore a good basis for a tax system.
- Site value taxation was at the heart of recommendations for New York City presented at economic hearings before NYC Comptroller Liz Holtzman in 1993 by Columbia Professor William Vickrey, who was awarded the Nobel Prize in Economics in 1996 for his work on auctions and congestion pricing. Unfortunately, he died between the announcement of the award and its presentation in December, and Prof. Lowell Harriss went to Stockholm instead to accept it on Vickrey's behalf.

Vickrey’s ideas faced practical implementation problems 15 years ago. Today, the obstacles are more political than practical. If New York City evolves toward a rational system, it will follow more of Vickrey’s recommendations. It was part of his genius to know that technology would in due course catch up to his brain. The New York Fed has helped move this process along.