Rail Access and House Prices: An Evaluation of Transport Improvement Benefits

Rail Access and House Prices: An Evaluation of Transport Improvement Benefits

Stephen Gibbons ¹ and Stephen Machin ²

Nov 2003

Executive Summary

Standard cost-benefit based transport appraisals evaluate the benefits of transport improvements in terms of commuting time savings. Typically, these time savings are valued at some shadow price related to the market wage. Increasingly, policy makers and researchers are becoming aware that these methods might seriously underestimate the real benefits of transport innovations. For a start, wages may change when transport costs for goods and commuters change. If so, then valuation of the commuting time changes at a constant wage is inappropriate. Another factor that needs to be considered is the reduction in uncertainty in travel and delivery times following from an effective transport innovation.

Perhaps more importantly, these direct effects operate in a complex environment of increasing returns and imperfect competition so there may be wider benefits to producers from transport improvements than those captured by commuting time cost savings. Transport innovations that concentrate workers and firms together in certain places may bring about a variety of production cost savings or technological advantages. Transport access can lower input costs, improve communications-related spillovers between firms, reduce labour market frictions and improve job-worker matching. It can improve worker efficiency directly by reducing commuting effort. If transport accessibility is linked to higher employment and workplace density, then general agglomeration and urbanization economies come into play: the higher level of productivity in cities and other places with high employment density may, in part, be explained by better transport access. ³

The Department of Transport is interested in appraising these 'wider economic benefits' of transport improvements, particularly in the context of Crossrail, the proposed rail link to run across London. This, if introduced, is anticipated to have a significant impact on commuting travel, reducing commuting times and improving services levels and accessibility of areas across London. In this report, we suggest an approach to evaluating the economic benefits of transport access and transport innovation using a method based on property values. The idea is to assess the overall economic benefits of rail access to the worker and commuter. We do this by using house prices as the outcome measure that we relate to rail access. We define rail access in two ways: by distance to a station, and by the service frequency at the nearest station. For a home-buying commuter, the benefits of better rail access to rail transport are two-fold.

Firstly, there is a direct saving on travel times to any remote destination. Secondly, rail access changes the distribution of job types and wages that are available by reducing commuting costs to more diverse and potentially more productive, higher-paid city jobs. On the other hand there may be negative environmental impacts, or problems of congestion near busy stations that we need to consider. Yet, if housing markets are efficient, residential property prices will reflect all the benefits and costs to commuters that a location offers in terms of proximity to railway stations, and the level of service that the station offers.

This story seems, on the face of it, to be just about the effects on the commuter: households value transport access because it allows them easier commutes to better paid jobs. What about the impacts at the work end of the commute? Can property values capture the benefits to the firm too? If we had good data on commercial and industrial rents then the answer is certainly yes. Places with better or improved transport access, should attract higher business rents if transport accessibility really benefits productivity or lowers input costs. ⁴ Without rents data, we must rely on residential property prices to tell us this side of the story too. Residential prices reflect the underlying land values, which will capture the benefits of location to all potential users of a site. If land is substitutable in use in the residential and business sectors, then land values reflected in residential property prices will capture the benefits to firms too.

This is one of the first studies to approach transport appraisal in this way, and the first to look effects of specific transport innovations - namely improvements to the London Underground and Docklands Light Railway in South East London at the end of the 1990s. The report is structured as follows. After this introduction, Section 2 describes our empirical methods we use. Section 3 outlines the data. Following this, Sections 4 and 5 discuss the empirical results in some detail. First we examine the long-run equilibrium outcomes observed in cross-sectional patterns of transport accessibility and residential land values. Next we look at the short run effects of our chosen transport innovation in South East London. Section 6 concludes with some observations about the implications of our results for transport policy, and with some approximate calculations of travel time values based on our results.

The full report in PDF format is available as a download (see top right of the page).

¹ Stephen Gibbons is Lecturer in Economic Geography at the London School of Economics.

² Stephen Machin is Professor of Economics at University College London.

Both Stephen Gibbons and Stephen Machin are members of the Centre for Economic Performance at the London School of Economics.

³ See for example Ciccone and Hall (1996), Ciccone (2002), Henderson (2003)

We would like to thank Joan Wilson for research assistance

⁴ Of course, in the long run rent differentials may be eliminated by increased supply of office or factory space.