What on earth is going on with the price of taxi medallions in NYC? Two of them just sold for $1 million apiece thats a 42% increase just since August, when conventional wisdom had it that $705,000 was a top tick and that medallions would soon plunge in value.
Derek Thompson reckons that this is a sign of how great New Yorks economy is doing:
Its all about supply and demand. The tailwind behind medallion inflation is a cap on taxi cab licenses. Even as the economy of New York City grew at a furious pace across three decades, the number of taxi plates stayed basically constant, despite wage growth and population growth and rising demands for cross-town transportation. As a result, their value rose tremendously.
One problem with this theory is that if you look at the chart of medallion prices, it doesnt seem to bear much relation to the strength of New Yorks economy. The majority of the rise in price has happened over the past ten years, which havent been particularly great, economy-wise. And certainly there hasnt been any citywide boom in the past two and a half months.
Jacob Goldstein has a similar theory.
Every cab in New York City has to have a medallion. And the city strictly limits the number currently just over 13,000. So as New York has prospered over the past few decades, the price of medallions has gone through the roof.
The economics of this, however, dont make a lot of sense. Cabs might get a little bit busier when economic activity picks up, but most of that extra income is taken home by drivers, rather than the owners of corporate medallions. (Corporate medallions are the ones where the owners dont drive the car; theyre the ones being charted here.) The income from a corporate medallion is pretty steady, and was spelled out in the comments to this post:
The maximum amount a cab leased out to drivers can earn over a year is $82,524. This assumes that the cab had a driver every day and every night and that it never breaks down. The day shift maximum charge is $105. The maximum night shift charge is $129 and that is only for Thursday-Saturday. Sunday-Tuesday is $115 and Wednesday is $120.
Youve also left out of your calcultions the cost of the car. Lets call it $27,000 and you are required by law to buy a new one every 3 years.
This is the real reason why medallions are so expensive: good old-fashioned interest-rate calculations.
Were basically talking about a real income stream, here, of about $75,000 per year. (Lets assume, for the sake of argument, that the income from a taxi medallion rises at the same rate as inflation.) Thats a real yield of 7.5% on a $1 million investment which isnt half bad at todays 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 dont 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, thats still a pleasant 5% yield on your money, and whats more its a yield which behaves much more like a real yield than a nominal yield. Paying $1 million for such a thing doesnt seem silly to me, especially when http://faunapowa.com/blog/2015/08/18/tips-renting-limousine-memorable-event/
