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Fair’s Fair for Third Runway

September 9, 2012

There is an obvious solution to the problem of whether to build a third runway at Heathrow. And it can be applied to a fourth runway and a fifth and a second at Gatwick etc. and the development of HS2, wind farms or other infrastructure projects where value is transferred from homeowners to capitalists.

The economic arguments in favour of the third runway are the same arguments that are given for every expropriation of private property, i.e. jobs, growth, technology and jobs. I expect the preambles to the Enclosure Acts describe in detail how privatisation of common land was going to create millions of jobs. What’s more the additional commerce drawn to the area will make property double in price…

The residents of west London are also using familiar arguments, i.e. our lives will be miserable and we won’t be able to move because our house prices will have dropped.

The solution is to construct a time series of house prices in the Heathrow affected area and to find an area in another part of London, without a proposed development, whose time series of house prices has matched Heathrow’s up till the last coupe of years, before the third runway effect distorted the relationship. House prices (really it’s the underlying land that rises in value – the price of a house starts to drop as soon as construction is finished) are a function of underlying economic activity. In fact, the owners of land seek to capitalise any increase in value associated with anticipated economic growth. The best example is what happens to house prices when the government announces it is going to extend a tube line? Prices may have already started to increase as those in the know start to buy, but once an announcement is made prices jump up dramatically. In that instance the landowners did nothing and got a windfall gain. In the cases of Heathrow or HS2 prices are projected to drop and the owners will suffer an unearned loss.

Therefore, by creating a synthetic time series of house prices using another area as a proxy, homeowners and developers can estimate what would have happened absent the expansion. If house prices rise, those who don’t like the expansion can sell at a profit and move, whereas if prices fall, the disgruntled can sell at a loss and have the development corporation compensate them for the price difference (plus stamp duty). Although there will be inconvenience costs to leaving an area one is settled in, any attempt to put an objective value on them is too complex. There is the possibility of using a formula, e.g. house price difference plus 10%.

If developers were obliged to add in the cost to them of compensating homeowners for loss of value due to one of their projects there would be a lot less building in Britain. And any building there was would be genuinely value-added, not simply the expropriation of private homeowners equity by well-connected developers.

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From → Chapter 1

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