I take seriously the forecasts that Ireland’s population is set to grow at the second-fastest rate in the EU and that Ireland needs more than 50,000 new homes per year to satisfy demand. These forecasts stress me out.

The forecasts imply Ireland will need to build a new Cork city every three to five years. I don’t see this happening. The system isn’t set up to grow that quickly.

There are broadly three ways to build homes: by infilling the existing towns and cities; by building new motorways and car-based suburbs; or by building new train lines and transit-based suburbs.

My read of Irish politics is that the first two are not likely to work. 

In the cities, the level of infill we’d need is an order of magnitude greater than we’re allowing at the moment. For example, an eight-story block of apartments in Smithfield was blocked by An Bord Pleanála this week for being too tall. Given our planning system, there isn’t enough space left to infill. People blithely point to brownfield sites as a solution, but there aren’t enough brownfield sites to satisfy demand. 

We’ll need to extend our towns and cities in one way or another. But in Ireland, extending the city by building huge roads is a political non-starter. The planning system has a bias against exurban sprawl and the political system doesn’t like building motorways. 

That leaves transit-oriented development: extending the city by building densely along rail networks. It seems to be the only solution that could work at the scale needed — 50,000 homes per year — that isn’t a political non-starter.

This week I want to show how savvy governments get the private sector to pay for new rail lines at the edge of town. It’s called land value capture.

Unearned profit

Land value capture is where the government bestows infrastructure on previously low-value land – which makes the land much more valuable – then profits when the land gets developed. 

It’s a great trick for many reasons. It incentivises the government to build dense, transit-oriented, high-quality neighbourhoods. It creates untold billions of land and property value. It frees up government resources for other priorities. It generates agglomeration which makes the economy richer. 

A report for Transport for London (TfL) found, of eight London rail projects under consideration at the time, the forecast increase in land value near the stations amounted to 242 per cent of the the cost of the projects. 

London rail projects don’t come cheap. They often involve tunnelling under the city. TfL’s finding was that, as costly as they are, the projects create more than twice the value for landowners as it costs to build them. 

Infrastructure always makes the surrounding land more valuable. The question is who should benefit: land owners, or the government that built the rail lines?

Governments find it hard to capture the value created by new infrastructure. The basic problem is that governments are slower than individuals. Governments make investment decisions slowly, and in the open. If an entrepreneur gets a sniff that a subway is coming, they’ll be in there quickly to buy land near the stations. This process has already begun along the metro line in North Dublin.

Even if a government were to act quickly and decisively to buy up land along the route of a new metro line, it would face the problem of holdouts. Holdouts are individual landowners who refuse to sell. They can make it impossible for the government to assemble the land required. 

Even if a government were to bribe or CPO the holdouts, buying up land has a big upfront cost. The government wouldn’t make its money back for at least a decade.

Every method of capturing land value has its drawbacks. The tax system, as constituted in most places, does a poor job of capturing changes in land value. Compulsory purchase orders are legally and politically tricky.

Today I want to talk about another option, one that might be a good fit for West Dublin in particular. West Dublin is begging for a bold rail investment and piles of housing. Leaving Heuston station, double-tracked rail lines are running through open fields for 20 kilometres. The line could move tens of thousands of people. The same goes for the Celbridge line, which is being low-key developed for Dart Plus. 

To develop those lines at high density, the big missing piece is a tunnel connecting Heuston and Connolly, through the city. But I won’t get into all that again. It’s all in last week’s piece.

The auction

There’s a pragmatic solution for capturing land value uplift that sidesteps the problems of other methods.  

It doesn’t capture as much of the land value uplift as a perfectly executed scheme in which the government swiftly buys all the land up front at its fair value. But as we’ve seen, that’s hard to do in practice. This method has most of the benefits and it’s much more practical.

Here’s how it works. First, the government picks a place with a lot of potential for development. Let’s say the train line from Heuston to Naas. It asks “If the government invested in this rail line to make it a high-capacity commuter line, how much development could take place along the rail corridor?”  

The planners would get to work and set out the densities that would work along the new corridor. Then they would grant all planning permissions in advance — like the docklands special development zone. No individual planning permissions. The same goes for the rail investment itself. The new city borough would at this point exist on paper.

The next step would be for the government to work out what the land would be worth in the absence of the development plan. In the Heuston to Naas case, it’s zoned as agricultural land, worth €35,000 or so per hectare.

The next step is to give landowners along the line a choice. They can either: do nothing; develop the land themselves, subject to a charge; or enter into a development rights auction scheme. The auction scheme is the interesting bit.

In the development rights auction, all the landowners pool their land together. The land is assembled into development packages. The packages are auctioned off. If the auction price is higher than the “no development price”, then the scheme goes ahead, and the landowners split the gain with the government. The gain might be split 60 to landowners, and 40 to the government. 

Why go through this rigmarole? It has a few advantages. For landowners who don’t want to develop their land themselves, it makes it easy for them to profit from the increased value of their land. Planning permissions would be all sorted, developers would bid competitively, and their land would be combined with others to create packages that were as valuable as possible. 

For developers who don’t own land, it would make it easy to access prime development land without the upfront cost of buying the land, and without planning risk. 

For the government, the advantage would be that it could share in the increase in land value without having to buy land up front, outmanoeuvre speculators, or make legally difficult compulsory purchase orders. It would be much simpler. 

Another point is that the government would get the auction money up front, which it could then use to develop the infrastructure. 

For some people, it might stick in their craw to voluntarily hand 60 per cent of the unearned land value uplift to landowners. But remember that land value capture is very hard to do and few governments pull it off. The auction model has a good track record for funding high-quality urban infrastructure. It’s how the giant city of Sao Paolo has been built in recent decades. Other new urban neighbourhoods such as in Copenhagen and Stockholm used land value capture too, albeit not using auctions.

Backwater

This idea isn’t merely fun to think about. We urgently need a workable plan to address long-term housing needs. 

The way we grow our cities worked for the backwater country we used to be. Now we need to figure out how to house and transport large numbers of people over the next twenty years. An answer is right in front of us.