It isn't every day that you see a single digit taxi license plate in Illinois. The plate number is also the medallion number. As is the case in many other cities, Chicago caps the number of medallions permitted to operate within the city limits, so the only way to acquire one is to purchase or lease it from a current owner.
In 2007, the average medallion sale price was $75,000. In September 2012, the median price was $345,000 and by the end of the month, medallions were selling for $375,000. (the publication that lists prices switched from reporting average to reporting median prices)
New York medallion prices are even crazier than Chicago prices. Last year, medallions were going for nearly $1,000,000. That's roughly a five-fold increase in the going rate since 2001.
When you look at the rise in the price of cab medallions, you can't be faulted for thinking it's a bubble. Felix Salmon says the price increase makes sense in light of very low interest rates over the last decade.
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.
Salmon also points out the risk of investment in a medallion at these prices.
Of course, there’s risk here too. Any time you see a chart like the ones above, you have to worry that there’s a bubble. Plus, there’s political risk: the mayor can print new medallions, making the existing ones worth a little less (but not a lot less, given that the income from medallions is largely fixed).
The ultimate support for medallion prices comes from strict governmental control of the cab business--everything from controlling the number of medallions to fares that can be charged. In Chicago, the city even controls the kind of shirt a driver must wear. But regulation doesn't explain the sudden steep climb in medallion prices.
With the byzantine array of current restraints, regulations, government incentives and disincentives, it's almost impossible to sort out what a relatively free taxi market in a city like New York or Chicago would look like. Economists who have studied deregulation have mostly concluded that deregulation is "on net beneficial." According to the authors at the link above, support for deregulation among economists "is preponderant, but not overwhelmingly so."
While taxis have been deregulated in many cities, there is virtually no chance that we'll see deregulation in NYC or Chicago any time soon. Raising or removing the medallion cap would in some cases bankrupt owners who paid hundreds of thousands of dollars for their medallions. Those owners would be justified in their objections to removal of the caps. On the other hand, big corporate cab companies that have owned most of the medallions for decades would mostly lose the windfall value of medallions they purchased for a relative pittance. As you might imagine, all of the owners, including the well-connected corporate owners, would fight tooth and nail against any increases in the number of medallions issued. There are a lot of fingers in the corporate ownership pie and none would welcome anything that dilutes shareholder value.
If you were the king of taxi regulation, what would you do? Would you remove the cap on medallions issued? What regulations, if any, would you keep in place? If you were to remove caps, what about those who purchased medallions for hundreds of thousands of dollars? Would you just say "screw them" because deregulation should have been a foreseeable risk when they made their investment?