Stu’s talk at an IPENZ forum the other week put forth a lot of smart critiques of and recommendations for the transport profession. I was particularly taken by this slide:
Stu argues that failing to account for the “opportunity cost” associated with using valuable land for moving cars can lead us to misallocate resources. This isn’t a new idea, but it’s an important one. Here’s what William Vickrey, who received the Nobel memorial prize in economics for his work on congestion pricing and auctions, had to say on the topic in 1963:
“a cost benefit analysis can justify devoting land to transportation only when the savings in transportation costs yield a return considerably greater than the gross rentals, including taxes, that private businesses would be willing to pay for the space. This in turn means that an even greater preference should be given to space economizing modes of transport than would be indicated by rent and tax levels. And our rubber-shod sacred cow is a ravenously space-hungry, shall I say, monster?”
Things have changed quite a bit since Vickrey’s time. For one thing, urban land prices have risen quite a lot in recent decades. For another, the long driving boom seems to have abated in most developed countries. In many cities, this means that the opportunity cost of space-hungry transport modes has increased.
I’ve had a go at putting together some evidence on this for Auckland (or New Zealand cities in general). Unfortunately, long time series on land prices and traffic volumes are not readily available, so I’ve had to use two proxy variables:
- I’ve used RBNZ’s national house price index, which goes back to 1962, as a proxy for land costs. I deflated the index by RBNZ’s long-run consumer price index to net out the impact of inflation. It’s probably reasonable to use this as a proxy for land prices given the fact that land prices have driven most increases in house prices over this period.
- I’ve used NZTA’s annual average daily traffic counts for the Auckland Harbour Bridge, which Matt’s compiled going back to 1961, as a proxy for overall traffic volumes. This is probably reasonable as they’ve followed similar trends – they boomed together in the 1960s and have flattened simultaneously over the last decade.
I’ve graphed the two indices below. Prior to 2000, traffic volumes generally increased faster than house prices. (Although you could argue that house prices started to rise faster in the 1990s.) Since 2000, house prices / land values have generally risen much faster than traffic volumes. (National-level data understates the degree to which land prices have risen in Auckland, in fact, as house prices flattened but never declined after the GFC.)
As an aside, in case anyone says that house prices have never fallen in NZ, take a look at the 1970s. Real house prices dropped by almost 40% from their peak in 1974 to the trough in 1980. In real terms, they didn’t recover for 20 years. However, this was masked by the overall high inflation rates prevailing in the 70s and 80s. If something similar happened today – and it could – it would have a catastrophic effect on household wealth and financial stability.
What can we conclude from this data? Potentially, quite a lot.
First, this data shows that Stu’s observation (and William Vickrey’s) is highly relevant for policymaking. Land prices are going up faster than vehicle demand, meaning that the opportunity cost of a space-hungry, car-based transport system is increasing. If this continues, our best option for achieving a transport system that uses resources productively will be to invest in space-efficient transport modes: rapid transit, cycleways, and the like.
Second, this may help to explain why growth in driving has stalled and growth in public transport demand has accelerated. My hypothesis is that the increasing value of space, rather than increasing fuel prices, is a fundamental driver of the increased viability of PT and non-car modes.
When land prices rise faster than car use, it tends to create incentives for the use and development of more space-efficient transport modes. This happens through two channels:
- First, transport agencies, which have constrained budgets for transport investment, find that they can’t build as many space-hungry roads when land prices are high. They face the choice of spending lots of money to acquire land, or spending lots of money to tunnel underneath valuable properties. So while New Zealand has ramped up its spending on roads, it may be getting less bang for buck.
- Second, private individuals and businesses, face higher costs to use or provide parking. In the absence of serious market distortions, this will mean that people provide less parking and/or charge higher prices for it. This in turn encourages people to use alternative modes.
I’d like to close with a comment from another Nobel economics laureate, Paul Krugman: “Productivity isn’t everything, but in the long run it is almost everything.” One key to achieving higher productivity is to change your approach in response to changing prices and changing demands. If space is getting more expensive, it’s imperative to use it more efficiently!