Comment 52489

By adrian (registered) | Posted December 01, 2010 at 23:05:37

If a $1 investment in LRT equals $10+ in new demand for nearby property owners, why are these property owners waiting for the government to build it? It doesn't make sense to not borrow $1 from the bank at 5% interest, build a private LRT and then watch the demand for my property go up by 10X.

Simply put, they're waiting for government to build it because they don't have hundreds of millions of dollars in existing capital and they don't have the right to tear up city streets and replace them with a private transportation network.

However, I think you are confusing the issue here a little bit. Let's suppose that the ratio of city to private investment is $1 to $10, even though Ryan originally wrote "up to" $10. When you say "$10+ in new demand", I believe what you are actually talking about - at least the way the real Adam Smith would put it - is a tenfold increase in the price of property & rents near the line, since increased demand directly correlates with increased prices. Correct?

But that's not what actually happens. Certainly, some increase in price would be expected; however, the benefit to the city in general is that developers invest their own money in an effort to further increase the value of their properties and thus their prices.

As an example, suppose that I am a developer with $100,000 to spare. I can invest the money in any number of different ways. Perhaps one way is to purchase stocks, where I can expect a 10% ROI. Or I can invest my money in improving my properties or building new ones, where I can expect an 9% ROI. The city builds LRT. Suddenly, new opportunities arise along the line: now I can expect that investing in property near there will net a 12% ROI.

In this example, investing in property would have always brought me 9% ROI but it would have been smarter to purchase stocks. However, the presence of LRT means investment in property now edges out stocks as the best place to put my capital. In turn, the city benefits.

I think this type of financial planning and decision making is very common among people with capital, and indeed, decisions that hinge on just a few percentages are the hallmark of committed capitalists. I think Adam Smith would concur.

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