Taxi medallion prices in New York City hit $1 million

A proposal to create a taxi medallion system in DC has met with resistance in this blog and elsewhere because of the way a medallion system creates barriers to entry and monetizes a government-received licensed for the well-connected. This story from the New York Times, "2 Taxi Medallions Sell for $1 Million Each," demonstrates that a medallion system is more about creating large businesses than it is about focusing on service improvements, especially because the original grantor of the license, the municipal government, gets no royalty from the later re-sale of this asset, all the subsequent value is reaped by the licensee.

From the article:

There are 13,237 medallions in the city; new ones, when issued, are sold at auction. But the medallion pool is rarely expanded, creating a scarcity that helps keep values high. (Many owners have objected to a city proposal that would allow livery cabs to pick up street hails outside busy parts of Manhattan, saying such a plan would lower the value of their medallions.)

Large fleets, which can control hundreds of medallions, often find it easy to secure financing to meet the high prices. Medallion sales can make for big business: the biggest lender, Medallion Financial, is a publicly traded company (ticker symbol: TAXI) and shares its skyscraper on Madison Avenue with the Rockefeller Family Fund.

Corporate medallions, like the two sold on Wednesday, do not need to be driven by their owners and can be leased out 24 hours a day. Individual medallions, which make up about 40 percent of the fleet and must be occasionally driven by the owner, are worth slightly less: the latest sale was for about $700,000.

This piece from the Reuters blog, "Why taxi medallions cost $1 million," explains that the price escalation is driven by the rate of return in the context of interest rates.

From the article:

We’re basically talking about a real income stream, here, of about $75,000 per year. (Let’s assume, for the sake of argument, that the income from a taxi medallion rises at the same rate as inflation.) That’s a real yield of 7.5% on a $1 million investment — which isn’t half bad at today’s interest rates.

Put it this way: how much would a bond paying a real yield of $75,000 a year cost? At the most recent auction, the 29-year TIPS cleared at an interest rate of 0.999%. At a 1% real yield, an income stream of $75,000 a year would cost you $7.5 million.

Now you don’t actually get $75,000 a year if you own a medallion. You have to pay for maintenance, insurance, and workers comp; you also have to pay someone to manage your drivers. But even if you bring the income down to $50,000 a year, that’s still a pleasant 5% yield on your money, and what’s more it’s a yield which behaves much more like a real yield than a nominal yield. Paying $1 million for such a thing doesn’t seem silly to me, especially when there’s a lot of room for capital gains as well.