How New York taxis explain Britain's housing market
Artificial scarcity creates its own supporters
"Actually, I am a Christian, and indeed a Roman Catholic, so that I do not expect 'history' to be anything but a 'long defeat’”
J.R.R. Tolkien
If a lifetime supporting Queens Park Rangers has taught me anything, it is that everything is bad and will continue to get steadily worse. This is particularly true of the housing market, where every incentive is set such that any government must wade through a formidable coalition of its own voters in order to achieve the smallest alteration to the planning system.
Everything is awful (and it’s usually the government’s fault)
New York taxi cabs are a great toy model for understanding just how snarled up the UK housing market is. If you want to drive a taxi in New York, you need a medallion. These are small metal badges issued by the state, pinned to the hood of cabs by the Taxi and Limousine Commission. The cost of time and materials required to create these is negligible, but by law the number issued is set to 13,587 putting a hard cap on the number of taxis allowed to serve New Yorkers.
With the number of taxis in operation limited, fares for passengers are higher and competition for those rides lower. In turn, this means that the medallions become an almost guaranteed stream of income, free from serious competition. You don’t even have to drive one yourself; you can buy one and lease it to drivers, keeping the medallion ‘working’ 24 hours a day (in fact, ‘corporate’ medallions must be in use at least 18 hours a day). The best part is that when you buy your medallion you aren’t buying a licence for a year, or a decade, or even a century. So long as you pay your renewal fees - a tiny fraction of the cost of obtaining it in the first place - then you can keep it indefinitely.
This means that a medallion in New York is a permanent licence to enjoy a privileged position in the market. It makes sense for would-be drivers to borrow large amounts to get one and secure a never-ending stream of ever-rising cab fares, just as it does for drivers today to hand over substantial lease fees for the right to use one. Unsurprisingly investors wanted in on this action, pooling money to buy medallions and lease them to drivers.
Originally sold for $10 each, medallions rose in price to $21,000 by 1961, $237,000 in 1998, $766,000 in 2009, to over $1,320,000 in 2013. With the supply of medallions controlled entirely by the state, and no close substitute on offer, the badges made for a superb investment. From 1980 to 2011, the price of a medallion rose 8% per year, outperforming gold, oil, real estate, and stock markets.
So let’s briefly take stock. State intervention puts in place a system intended to benefit passengers and drivers by reducing crowding on the streets, keeping wages at a living level, and ensuring quality of provision. This intervention works by limiting supply artificially, and imposing regulation on the service provided.
How’s that working out? Well, remember that hard cap of 13,587 taxis? When the medallion scheme was introduced in 1937, there were somewhere in the region of 7,300,000 people living in the city. There are now roughly 1 million more New Yorkers. The number of medallions, on the other hand, has grown by… 21.
This restriction means passengers pay higher fares, wait longer, are more likely to be refused travel, receive lower quality service, and face a market that has no need to respond to their needs.
Drivers are willing to pay for access to this market, with licence fees and loan repayments squeezing the profit they would otherwise have earned. Only 18% of drivers own their own medallions; the rest lease them from owners, paying a set fee for the right to drive, and taking on each day’s market risk in doing so. For the owner-operators, while they have no lease fees to pay hourly earnings after the cost of servicing the loans required to obtain a medallion are substantially lower. In Chicago, which operates a similar system, 24 days per month of 13 hour shifts in 2009 earned a driver $0.56 per hour.
The system certainly doesn’t benefit would-be drivers - often lower income, or recent arrivals - who find themselves locked out of a source of employment that is otherwise easily accessible without significant capital investment.
Even the medallion owners have reason to object; while the rents associated with restricted supply tend to accrue to them, by the time the cost of financing the initial purchase is accounted for the return tends to be substantially lower. People buying medallions do so with the expectation of a given stream of fares, and a corresponding rise in the value of their new asset over an extended period. This means the price of the medallion has these returns baked in.
In other words, the largest benefits accrue to the earliest buyers, all-but gifted a share in a monopoly by the state. After that point, while medallion owners derive some benefits, these largely result from unexpected changes that boost the value of their asset. And, of course, those changes can go the other way as well.
Self-sustaining dysfunction
The problem with this system is that it is almost impossible to win support for change. This isn’t because it works, but because it creates a form of self-sustaining political dysfunction.
The owners of medallions clearly do not want their value to fall. Owner-operators have their life savings invested in their assets, and frequently took on massive quantities of debt to finance obtaining their licence to work. A significant decrease in the value of an asset you borrowed nearly $1 million to buy is life-ruining. Leasing companies invested in the expectation of a given return, and have every incentive to lobby against reform. Financial institutions lent money to these companies with the sense that the medallions were a form of collateral that made the loans nearly riskless.
In other words, while drivers who rent the right to work and would-be owners would dearly like prices to be lower, existing owners are a powerful interest group grimly opposed to any reform because they are financially locked into the current system.
Sound familiar?
The obvious answer for a government facing this sort of conundrum in the future is not to let it arise in the first place. It is far, far harder to correct a market failure once you’ve created a group whose material wealth depends on preventing you from doing just that.
One of the reasons reform is so hard is that for the government to compensate the owners of the restricted asset would cost a fortune. Moreover, any such attempt would involve effectively paying for the expected future income of the asset, transferring the cost of the market failure onto the taxpayer again.
A way out we don’t have.
With all this said, the value of a medallion in New York has fallen back down to somewhere around $200,000. The monopoly granted by the medallions was not total. What the yellow cabs had a stranglehold on was the “walk-up” market; street hails and pick-ups from designated taxi-ranks. A different market existed alongside the traditional taxis consisting of “for-hire” vehicles, which are only allowed to serve passengers who have booked in advance.
Still, as medallion prices rose towards their peak, it wasn’t as if technology was about to provide a mechanism through which anyone could reach into their pocket, open up an app, and make a booking with all the ease that you might raise a hand in the air to hail a passing cab.
For owner-operators, this ‘Uber Effect’ has been a disaster. Stories of individual medallion owners finding themselves trapped with unserviceable debts are heart-breaking. Predictably, the arrival of ride-sharing apps was vigorously fought by the market incumbents, who argued that they infringed on the property rights possessed by medallion holders. They lost.
NIMBYs Delenda Est
And there ends the parallel with the UK’s dysfunctional housing market. The price of housing in the UK has spiralled over the past half century, with real prices - flat from 1850 to 1960 - doubling from 1960 to 1980, then tripling again from 1980 to 2020. This has been driven in part by lower interest rates driving up asset prices - just as the boom in medallion prices coincided with easy availability of credit - but also by strictly limited supply.
Just as with the taxi market, constrained supply means lower quality provision and higher prices. Those who lease their houses rather than buy them feel the pinch particularly strongly; the average rent to income ratio in London rose from 25.5% in 2001 to 34.4% in 2014, while space per person for private renters dropped nearly a quarter from 1996 to 2012. Household size, meanwhile, has grown as people share buildings to make ends meet, and record numbers live with their parents.
Millennial renters, in particular, pay almost three times as high a share of their income on housing costs as the baby boomers did. As for getting a mortgage, the cost of a deposit is far out of reach for many.
House prices, like taxi fares, are driven by expectations of streams of future rents - whether the return you’d get from renting the property out, or that you would have to pay if you didn’t already own - and price increases. In order to restore affordability, we need to do something that will drive those streams down.
As with the medallion market, those who already own the scarce resource form a significant political bloc opposed to any such change. If your net worth - your debts, savings, and retirement plan - is tied to the value of one single asset, then a drop in house prices is a disaster.
This objection takes the form of a general acceptance that more housing would be desirable, alongside an ironclad objection to any housing in their immediate neighbourhood, where it might affect the price of their property. Similarly, New York Taxi drivers are probably rather relaxed about the provision of taxi services in Chicago.
The big difference between the markets is that there is no easy technological fix that can bail the government out of having to make a decision here. We can’t create tens of thousands of units of supply through a clever technological trick that avoids the battle associated with loosening regulation. The chokehold on supply is maintained through the planning system, and it will require active political energy to change that.
The planning reforms announced in the Queen’s Speech are potentially a step in the right direction. The best indicator that they might work is that the groups interested in maintaining property prices absolutely hate them. It’s also one of the best indicators that they might get watered down; unless the government is willing to overrule its own voters, we won’t get anywhere. We will be stuck with a dysfunctional market making people worse off, trapping them with large debts, and turning them into lobbyists for its maintenance.
Loosening planning permissions and then building for building's sake isn't the panacea we need. Developers left to their own devices are building horrible quality houses (to squeeze the margin due to the insane cost of land), in often badly planned housing estates with no civic architecture.
Where your analogy falls down is that medallions suffer only from man made scarcity, however land is genuinely scarce - if I own a specific piece of land I monopolize it, no else can use it - so in a sought after area that land is mad expensive. However I've done nothing to earn any increase in its value over time. The fair method to reduce house prices would be to tax the unearned increase in land value . Owners would be forced to use it for something efficient or else sell up. Reducing demand for the land is as important as increasing supply (of the right kind of housing - in my opinion public housing)
Superb article, as always.