I don’t see your point. If you are saying that there are many nearby sites for transit expansion, then the owner of the land should not sell at a low price, because if any of those sites is chosen, the land value will go up.
If you are saying that there are many alternative sites across the country, then this is not relevant. Those projects aren’t mutually exclusive.
We have to keep in mind that the land owner will not profit from the project being completed once the land is sold, they will only profit from the sale itself. The rational move is either to keep the land in case a project goes through, or sell it at the future price because selling means giving up on potential future profit of the project going through.
I’m not trying to say that the possibility of increased density via transit has no effect on land values relative to today: I agree the possibility of transit raises land values. My claim is that it doesn’t raise land values very much.
But it also sounds to me like you’re giving a mistaken framework for how to value things where there are many different amounts they could be worth in the future? I would propose using expected value: value the land in proportion to how much it would be worth in all of these different potential futures, scaled by their probability.
Ok, let’s stick to this notion of expected value because it plays both for the land owner and for the transit system builder.
To get back to your post, the plan was to buy an area, build a transit system in the middle of it, then sell the rest at a higher price. If you fail to buy all the land you need (or at least enough of it), you may give up on the project, in which case the value of the land does not increase. So indeed, as the transit system builder, the viability of your project (and the profit attached to it) is linked to the probability that you indeed acquire the land you need (both the land to physically build the transit system and the land around to sell later at a higher price), as well as the price at which you will be able to buy the land first, and re-sell it after completion.
Now, if the land owner are correctly calibrated, and they correctly anticipate the odds of your project being a success, your expected profit on the sale of the land must be zero.
If, on the flip side, you expect to make a profit because the land owners will underestimate your ability to succeed, will not see you coming, not understand what you are trying to do, or something along those lines, then your strategy relies on the market not being efficient. If this is the case, I think this is a crux.
“Now, if the land owner are correctly calibrated, and they correctly anticipate the odds of your project being a success, your expected profit on the sale of the land must be zero.”
I worry that this argument appears to apply to any business venture at all that involves buying land. Indeed, it applies to any business venture at all that involves buying anything. But, many people seem to think that projects that involve purchasing goods or services can in fact be profitable.
Goods (such as steel or land) can be improved by turning the steel into a plane, or adding a train connection to the land. Your model seems to be roughly that the current owner works out the chances that someone will buy the steel or land and turn it into a plane, or add a train connection, and then they price with that chance in mind. The problem (I think) is that their is causal connection between the price and the process of it turning into the imagined end product. If you charge extra for your steel because you think it will turn into a plane, then it won’t, because Boing will just buy steel from someone else and turn that into a plane instead of yours.
This doesn’t sound right to me. Let’s take a very simplified situation.
Imagine there are several identical places where I’m considering buying a bunch of land and then building transit there to make it more valuable.
The value of land if this option were removed is V1
The value of land after I build transit to it is V2
I get all the land owners together and we have an auction, where I offer to buy from whichever owner gives me the best price, wouldn’t you expect to end up with a price much closer to V1 than V2?
In a real scenario properties wouldn’t be identical which makes an auction a poor fit and it wouldn’t look exactly like this, but it doesn’t seem that far off?
Now, you might say that V1 is actually quite high, nearly or exactly as high as V2 because these land owners could sell to someone else who also has a “buy land, build transit” approach. Then I agree there’s no profit, but that’s a standard result in economics: under perfect competition economic profits are zero.
I don’t see your point. If you are saying that there are many nearby sites for transit expansion, then the owner of the land should not sell at a low price, because if any of those sites is chosen, the land value will go up.
If you are saying that there are many alternative sites across the country, then this is not relevant. Those projects aren’t mutually exclusive.
We have to keep in mind that the land owner will not profit from the project being completed once the land is sold, they will only profit from the sale itself. The rational move is either to keep the land in case a project goes through, or sell it at the future price because selling means giving up on potential future profit of the project going through.
I’m not trying to say that the possibility of increased density via transit has no effect on land values relative to today: I agree the possibility of transit raises land values. My claim is that it doesn’t raise land values very much.
But it also sounds to me like you’re giving a mistaken framework for how to value things where there are many different amounts they could be worth in the future? I would propose using expected value: value the land in proportion to how much it would be worth in all of these different potential futures, scaled by their probability.
Ok, let’s stick to this notion of expected value because it plays both for the land owner and for the transit system builder.
To get back to your post, the plan was to buy an area, build a transit system in the middle of it, then sell the rest at a higher price. If you fail to buy all the land you need (or at least enough of it), you may give up on the project, in which case the value of the land does not increase. So indeed, as the transit system builder, the viability of your project (and the profit attached to it) is linked to the probability that you indeed acquire the land you need (both the land to physically build the transit system and the land around to sell later at a higher price), as well as the price at which you will be able to buy the land first, and re-sell it after completion.
Now, if the land owner are correctly calibrated, and they correctly anticipate the odds of your project being a success, your expected profit on the sale of the land must be zero.
If, on the flip side, you expect to make a profit because the land owners will underestimate your ability to succeed, will not see you coming, not understand what you are trying to do, or something along those lines, then your strategy relies on the market not being efficient. If this is the case, I think this is a crux.
“Now, if the land owner are correctly calibrated, and they correctly anticipate the odds of your project being a success, your expected profit on the sale of the land must be zero.”
I worry that this argument appears to apply to any business venture at all that involves buying land. Indeed, it applies to any business venture at all that involves buying anything. But, many people seem to think that projects that involve purchasing goods or services can in fact be profitable.
Goods (such as steel or land) can be improved by turning the steel into a plane, or adding a train connection to the land. Your model seems to be roughly that the current owner works out the chances that someone will buy the steel or land and turn it into a plane, or add a train connection, and then they price with that chance in mind. The problem (I think) is that their is causal connection between the price and the process of it turning into the imagined end product. If you charge extra for your steel because you think it will turn into a plane, then it won’t, because Boing will just buy steel from someone else and turn that into a plane instead of yours.
This doesn’t sound right to me. Let’s take a very simplified situation.
Imagine there are several identical places where I’m considering buying a bunch of land and then building transit there to make it more valuable.
The value of land if this option were removed is V1
The value of land after I build transit to it is V2
I get all the land owners together and we have an auction, where I offer to buy from whichever owner gives me the best price, wouldn’t you expect to end up with a price much closer to V1 than V2?
In a real scenario properties wouldn’t be identical which makes an auction a poor fit and it wouldn’t look exactly like this, but it doesn’t seem that far off?
Now, you might say that V1 is actually quite high, nearly or exactly as high as V2 because these land owners could sell to someone else who also has a “buy land, build transit” approach. Then I agree there’s no profit, but that’s a standard result in economics: under perfect competition economic profits are zero.
You get back to the point of projects being mutually exclusive. Can you elaborate in your example on why the projects would be exclusive?
In the scenario I’m imagining, the builder has capacity constraints (limited capital, organizational scalability)