The Economics of Real Property

An Analysis of Property Values and Patterns of Use

Ralph Turvey

• Publisher: Taylor & Francis
• Year: 2017
• Print ISBN: 9781138102576
• eBook ISBN: 9781351594042
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Originally published in 1957. This book applies modern economic theory to the subject of land economics. The author is primarily concerned to show the role of analysis, with the main emphasis on urban real property. The first part discusses the working of the price mechanism in the property market. The second contains an extension and application of the analysis to property taxation and to two kinds of State intervention in the use of property. The chapter on the taxation of site values, for instance, is an original, general equilibrium analysis of the effects of taxation. The chapter on Compensation and Betterment, which ends the book, includes an analysis of recent British experience.

CHAPTER IX

COMPENSATION AND BETTERMENT

The Problem

TOWN and country planning in the broadest sense includes a whole range of public controls over the use of property and the acquisition of property for use or development by various public authorities. Such activities as the redevelopment of slum areas, zoning, regulation of the type of building, the construction of new highways, the establishment of new towns and the control of advertisements all fall within this broad category. The present chapter is devoted to one particular problem which inevitably arises, the problem of compensation and betterment.

Where property is compulsorily acquired, for example as the site for a new school or as part of a road-widening scheme, the owners of interests in the property will be made worse off unless they are compensated. But the impact of planning upon the fortunes of property owners is not confined to the case where interests are taken from them; in addition, various measures may affect the value of interests in property without any change in ownership. Thus, if an area is zoned as a green belt and new building is prohibited, the value of sites in the area which are suitable for new housing may suffer a considerable fall. Or the requirement that new shops in a town must have a three-storey front elevation may require an outlay on construction in excess of the optimum (from the point of view of the developer) so that the value of shop sites is reduced. Such effects on property values can also be favourable, as when the provision of a new housing estate raises the value of nearby shops.

These examples demonstrate that the financial impact of town and country planning upon property owners can occur in many ways and that it can be positive as well as negative. In consequence it has to be considered whether money should be paid to those property owners made worse off and taken from those made better off. More precisely, the compensation-betterment problem consists of deciding the extent, occasion and method of paying compensation for property interests which are compulsorily acquired or depreciated in value and levying a charge on the owners of interests which are appreciated in value.

The meaning of the term ‘compensation’ is clear, but ‘betterment’ has been used in several senses. In the narrow sense, betterment means the increase in the value of neighbouring property brought about by a particular improvement, such as the construction of a new street. In the broader sense, it means ‘any increase in the value of land (including the buildings thereon) arising from central or local government action, whether positive, e.g. by the execution of public works or improvements, or negative, e.g. by the imposition of restrictions on other land’.¹ In either case it is a little confusing to contrast it with ‘compensation’, for the complement of the latter is not the betterment itself but charges levied in respect of it while the complement of ‘betterment’ is ‘worsement’.

Any solution to the compensation-betterment problem must specify when compensation is to be paid, who is to pay it, how it is to be financed and how it is to be assessed. Similar matters must be specified concerning any charges levied upon betterment.

Recoupment and Betterment Charges

The finance of London street improvements undertaken in the nineteenth century affords an example of a compensation-betterment scheme which is worth examining despite the lapse of time, a reasonable amount of information being available. The construction of urban motorways now would meet similar problems, and recoupment as a means of securing some share in betterment to the public authorities can be employed in the creation of new towns as well as in various urban improvements similar to those undertaken in London.

Recoupment involves the purchase of more land than is necessary for the construction of an improvement and the subsequent resale of the surplus once the improvement is completed. The owners of property acquired for recoupment, i.e. the owners of property which is adjacent to the improvement, thus lose both their property and any betterment accruing to it as a result of the improvement, but receive compensation in the same way as those owners whose property is required for the actual construction. The fairness or unfairness of this depends upon how generously compensation is assessed. The net gain to the authority undertaking the improvement equals:

the resale value of the property acquired for recoupment;

+ the enhancement in the resale value of remnant land¹ due to its being united with the land taken for recoupment;

– the compensation paid for the property acquired for recoupment.

This net gain, by reducing the net cost of the improvement, will redound to the benefit of the taxpayers whose taxes finance it. Thus the distributional effect of successful recoupment is to make the owners of adjacent property worse off and taxpayers better off than they would otherwise have been.

The use of recoupment can affect the allocation of resources in three ways. Firstly, the prospect of reducing the net cost of improvements may increase the number undertaken, since local authorities in particular may be deterred from undertaking new projects on account of their cost. Secondly, the redevelopment of land adjacent to the improvement (i.e. that taken for recoupment) may be facilitated. All interests in the property taken are bought out and consequently there are no sitting tenants with leases terminating at various future dates, so that demolition and redevelopment are not postponed. More importantly, the freehold is concentrated into one hand, so that the land can be redivided into sites of an area and shape suitable for redevelopment. For example, a large number of small house sites may be amalgamated into a few sites for office blocks. Thirdly, the remnants can be amalgamated with the land taken for recoupment, thus providing it with access to the improvement. Otherwise, being small or oddly shaped, the remnants may remain vacant or be suboptimally developed with awkward or unsightly buildings.

Before describing actual experience with recoupment in London,¹ something more should be said about the effects of the construction of a new street, or the widening of an old one, on property values in the neighbourhood. It appears that where a street improvement in London had a big effect on local property values it tended to have this effect by causing a radical change in the character of the area, so that old buildings, many of them obsolescent dwellings of a poor type, were pulled down and new ones erected, fronting on to the new or widened street and serving a different purpose. Thus a rise in ground values of the frontage land might well be associated with a fall in the existing use value of standing buildings in adjoining streets. This seems to have been the case in Soho with the construction of Charing Cross Road and Shaftesbury Avenue, completed in 1887 and 1886 respectively. Mr. Tewson, a valuer giving evidence to the House of Lords Committee on Town Improvements in 1894, said in respect of the latter:

‘I certainly do not find that there has been any improvement in the side streets. The street itself, of course, is a great improvement, but the side streets have suffered because of that improvement. The businesses which are carried on in the side streets have lost a great deal of the custom which used to come from the old streets over which this now passes…. The new street is taken up with a different class of property. There used to be old rag shops, old clothes shops, and marine store dealers of all kinds on the line of the old street.’¹

This fall in the value of the tenants’ interests was partly due to the diversion of traffic to Shaftesbury Avenue. The vestry clerk of St. James, in pointing this out, added, ‘We used to have considerable traffic up some streets which are now very little more than playgrounds; and we have found that ever since Shaftesbury Avenue has been opened these back streets have on each change of tenancy shown a reduction in rent.’² A further reason for the decline in rents was that the construction of the two new streets displaced a considerable number of families, which reduced the trade of local retailers, since a different class of people came instead. It was said that ‘there is a great outcry in all the back neighbourhood that the customers have been driven away’.³ The value of public houses was often reduced in this manner.

An example of betterment due to a street widening and improved access in another part of London was given in a memorandum by the Chief Valuer of the London County Council in 1903.⁴ He was

‘of opinion that the property on the south side of the Strand has considerably benefited by the widening of the Strand, and in support of that view witness would point out that a property now occupied by the Daily Graphic office, opposite St. Clement Danes Church, recently changed hands at public auction at a price which represents at least £16 per foot super for the freehold. Prior to the Council depositing their Bill,⁵ £10 per foot super was the highest price that had been established for property in this position. Just prior to the deposit of the Council’s bill, the Daily Graphic property itself was sold publicly at a price which worked out between £8 and £9 per foot for the freehold.’

In some cases, however, not even the property fronting upon a widened street was benefited.

‘It does not follow that because the street is wider than it has been that it is necessarily a better street for trade. I think that in London the narrow streets are very often better for trade. Take Old Bond Street for instance. I would rather, if I were a shopkeeper, be in Old Bond Street than in Regent Street, because if you are walking up or down Old Bond Street you can see … a shop window if it is on the other side of the way and you have only two lines of carriages to contend with.… The object, I think, of a retail tradesman is to get as many people as he possibly can in a street, and to keep them there as long as he can…. The effect of a wide street is to give facilities for quick traffic and to get the people in and out of the street as quickly as possible.’¹

Particularly in the case of new streets, considerable redevelopment occurred in consequence of improvements, however, and this was no doubt often as much the result of a rise in the site value of properties as of a fall in their values in their existing use. In other words, alternative uses often became more profitable absolutely and not merely relatively. But this did not always happen; there were cases where an improvement led to no change of use. Thus the construction in the City of Queen Victoria Street did not affect the character of the area, as the property behind the street was not suitable for rebuilding and was already very valuable.² The bankers and dealers of the City could not be outbid for the famous square mile.

In the thirty-three years of its existence the Metropolitan Board of Works spent £5^¼ million on street widening, £7 million on new streets and £3 million on embankments, obtaining £5^¼ million recoupment. Land was first acquired for purposes of recoupment in 1876. Previously the Board had normally acquired only those properties all or part of which were required for the construction of the street. This left oddly shaped parcels of land, often very small, which made development of the frontages difficult and unprofitable, so the Board took backland as well in order to create plots of suitable shapes and sizes fronting on to the new street. The motives for this were no doubt both the creation of usable sites and recoupment. It has been asserted that ‘if it had been only a question of intercepting the benefit they would have gone very much further than they did’,¹ but even so this limited recoupment added very considerably to the gross cost of property acquired.

The procedure of the Metropolitan Board of Works may now be briefly described.² When the necessary powers had been obtained and plans made of the property to be acquired, notices to treat were served on the owners of interests in the properties concerned. These owners then submitted claims, many of which were settled by negotiation and others by arbitration, which sometimes t...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• PREFACE
• I INTRODUCTION
• II URBAN PROPERTY VALUES
• III THE NATURE OF THE URBAN PROPERTY MARKET
• IV THE PATTERN OF URBAN PROPERTY VALUES
• V AGRICULTURAL LAND
• VI PROPERTY TAXATION—RATES
• VII PROPERTY TAXATION—THE RATING OF SITE VALUES
• VIII FREEDOM OF CONTRACT
• IX COMPENSATION AND BETTERMENT
• INDEX