Value capture has been advocated as an innovative way to finance infrastructure, including by the Australian government. However, its effectiveness in Australia has been questioned. Our research based on the demolition of railway level crossings in Victoria shows that infrastructure projects do lead to higher property values that can be used to finance projects.
Property values have increased by a quarter near level crossings. This highlights the opportunity to use value capture models.
What is the concept of value acquisition?
Infrastructure investment improves connectivity and raises the value of land or property in the areas that benefit. Value capture USES this increased value — often using some form of tax — to help finance the infrastructure that led to the increase. Value capture has been widely used abroad. In the UK and Hong Kong, this has proven to be an effective way to fund large infrastructure projects. The practice is unusual in Australia, where most infrastructure projects are funded by the government. The gold coast light rail was developed with the help of a tax on taxpayers.
However, the lack of funding means that many large infrastructure projects cannot be funded at the same time. This highlights the need to find innovative ways to finance infrastructure, including exploring the potential benefits of value capture. Financing infrastructure through value acquisition has been widely discussed and considered by a parliamentary inquiry. The concept features prominently in the federal government’s smart city initiative and will complement the 30-minute urban smart city vision.
Does this work in our low-density cities?
But there is debate about how well this model works in Australia. It was argued that the low-density nature of Australian cities would lead to a lower level of value creation. However, there is little empirical evidence of value creation in Australia. Despite the obvious policy benefits of how much land value has increased since the new railway investment and to what extent it can be attributed to investment, there are still many questions to be explained. Our research, based on a level crossing demolition project in Victoria, found that property values near each site could be significantly increased. The state government began the program in 2015. Its goal is to eliminate 75 dangerous and crowded level crossings to improve traffic flow in the big city of Melbourne. Our unpublished findings will be presented at the Pacific rim real estate association’s annual meeting.
Importantly, it is one of the largest rail infrastructure projects in the state’s history. As of December 2017, the budget for removing 50 checkpoints is estimated at a $8.3 billion. With 25 more sites added to the project in 2018 and 2019, the final cost could be even higher. The project caused inconvenience to local residents during construction, and the ability to ease traffic congestion was limited. The national auditor-general reported that the pace of progress and sharp budget cuts “pose risks to achieving value for money.” Despite the temporary inconvenience at the construction stage, transport links will be strengthened once the project is completed.
House prices have risen, but they are volatile
In order to provide some empirical evidence that the level crossing demolition project can increase the value of the house, we examined four sites, Bayswater, Mitcham, Glen Iris and St alban. We found that the average value of houses in the area around the site increased by 9% after the horizontal intersection was removed. This positive effect decreases with distance from the site. It disappeared 1,400 meters away.
We also found that the effect of horizontal cross clearance varies from site to site. Housing prices in affected areas increased by 8.81% in Bayswater, 28.6% in Glen Iris, 10.5% in St alban, and only 2.1% in Mitcham. Similar evidence was found in these areas :Bayswater house price increased by 2.35%, Glen Iris by 7.3% and St alban by 6.53%, but Mitcham house price did not increase significantly.
conclusion
Our study has three conclusions:
1) overall, the horizontal cross removal project in Victoria does result in higher property values. This highlights the need for a comprehensive plan aimed at maximizing opportunities for value acquisition.
2) despite the low density of Australian cities, value capture is a potentially viable model. However, its possible effectiveness varies greatly from place to place. This reinforces the importance of a comprehensive plan.
3) given the critical importance of infrastructure for urban development, the government should consider using value capture to fund infrastructure to help meet urban development needs and reduce Australia’s housing shortage.
Use “land value capture”, but does that also mean more tax?
With the federal government aiming to kick-start investment in urban infrastructure, with $50m of public money pledged in the 2016 budget to explore alternative financing mechanisms, attention is turning to the idea of “land value capture” to attract the necessary funding. Simply put, land value acquisition involves financing the railroad itself with the additional value created by the railroad’s presence on the land around the urban track. This allows private investors to benefit from urban development, such as the development of the shopping centre at the new railway station, using the expected additional tax revenues as the primary source of funding for infrastructure.
Depending on whom you listen to, the idea is either an infrastructure panacea or not what it’s cracked up to be. This has become a controversial issue for developers. The Property Council of Australia and Anthony Albanese, shadow infrastructure minister, have also described it as another sneaky way of taxing the us, most notably. So what is the essence of land value acquisition?
Raise taxes, not raise them
Value acquisition can be achieved using the concept of tax value-added financing (TIF), which is widely used in the United States to deliver urban rail projects. Here’s how it works. New infrastructure, such as improved transport networks, can increase land value because of the additional convenience provided by infrastructure. Governments can generate additional tax revenue through development without having to raise existing tax rates. These tax increases can come in the form of local government rates, state land and stamp taxes, federal capital gains taxes and even real estate sales taxes — meaning all three levels of government benefit. Tax revenues can be predicted and included in future budgets as a means of paying for infrastructure up front. The big winners from any infrastructure improvements are nearby private landowners, who reap a windfall in land value without paying for infrastructure.
The basic TIF model itself does not involve raising taxes. But the government could impose additional taxes on specific areas of land to fund specific infrastructure projects. The approach was used to fund a $1 billion light rail project on the gold coast. The government collects a tax on all residents to help raise initial capital and operating costs. These additional taxes can also be collected on the land, and developers will receive considerable additional profits as a result of infrastructure construction. That prospect has been used as a scare tactic by the Australian real estate commission, which wants its members to avoid having to contribute. But keep in mind that, despite the demands of the real estate board and albanese, a special tax is not necessary to realize the value of the land. They are optional and not the only way to use land values for infrastructure.
