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 Donovan Cities

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.

AHB traffic volumes and real house prices, 1961-2014

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.

Northern Busway efficiency
Hooray for rapid transit!

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:

  1. 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.
  2. 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!

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  1. The slide seems to be mixing up roads and cars. The issue is roads are being used by low productivity cars. The roads themselves are necessarily low productivity. We just need to price the roads to use the space more efficiently.

  2. I guess hong kong is a good example of this? virtually no roads and only the mega rich own cars

    if you want less cars you need intensification of accommodation in central city areas

    1. While Hong Kong is an example of one approach, it’s certainly not the only way to go.

      In my view, Auckland’s population density isn’t a problem. My analysis suggests that Auckland’s got the sort of density that would support good uptake of public transport, walking, and cycling:

      Our challenge is less about where and how people live, and more about how we invest in and manage transport networks. As we get a good, frequent bus network in place, supported by interchanges in the right places, bus lanes/busways, and some crucial bits of infrastructure in capacity-constrained places (e.g. CRL), I suspect that things will work quite well. No Manhattanization needed.

    2. So, wandering away from the car angle, the next logical thought pattern is telling people how big their homes can be, gardens, playing areas, even parks? Same logic.

      1. “the next logical thought pattern is telling people how big their homes can be, gardens, playing areas, even parks?”

        No. This is arrant nonsense. You can have as much space as you want, as long as you’re willing and able to pay for it. That’s the way that housing markets currently work. All I’m arguing is that we should apply the same market logic to our transport system.

      2. “telling people how big their homes can be” – But that is exactly what anti-density rules do.

        Those rules tell people, your section must not be smaller than this size, the house must not cover more than this percentage of the section and it must be set back this distance from the road. Or as a business you must have this much parking.

        That is regardless of what people actually want to do.

        So I assume you are all for removing all these rules as otherwise that would be hypocrisy. No?

  3. In terms of policy we are stuck in a time warp about Auckland, with many important people, both inside and outside the city, believing tired old cliches about its scale, density, growth and most importantly, prospects. As Keynes said in an earlier time of change:

    ‘It’s not the new ideas that are the problem, but getting away from the old ones.’

    1. Not just Auckland. The whole country is stuck in this time warp.

      “Ladies and gentlemen, we are now arriving in New Zealand. Set your watches back 30 years”.

  4. I am surprised to see that claims are being made in such a forum that are un-cited. Is this his opinion?? What data is this based on…?

    1. Stu’s talk is based on a paper he presented at this year’s IPENZ Transportation Group conference following a peer review by other IPENZ members. It’s available online here:

      And, as my reference to Vickrey’s work should suggest, these are not new or particularly contentious ideas. Economists have been making similar points for over half a century.

  5. If something similar happened today – and it could – it would have a catastrophic effect on household wealth and financial stability…

    …of people who own property. Persons who don’t own property benefit and the economy frees up resources to invest in productive capability that was previously being consumed by rising accommodation costs.

    What can we conclude from this data? Potentially, quite a lot.

    That improvements to public transport drive increased property values and should therefore be funded by property rates.

    1. Doesn’t the same logic apply to city motorway development which may not be the best option for a livable attractive city? And motorways are paid by NZTA My contention is that Metro systems are equivalent to motorways and should be paid from the same source.

      1. No, as you can see from the graph motorway usage is certainly not beneficial to land value and is probably detrimental. Metro systems (and other modes that reduce motorway usage) can therefore be inferred to be beneficial to land values.

        Asking a ratepayer to pay for a motorway is like asking a renter to pay for a Metro system.

        1. If you go to point no.9 here Workers that have access to more places of employment in a given travel commute -ideally 30 minutes but benefits exist up to 1 hour, are associated with higher productivity and higher real wages.

          I believe it is not unreasonable for workers and business who benefit from this productivity to pay some form of tax to provide housing regulations + transport infrastructure to provide this transport access and ensure housing is affordable so that workers can afford to accommodate themselves (or family) close to their place(s) of employment/study. Especially given that transport infrastructure is a public good that needs to be ‘planned’ by the state and usually also provided by it.

          Just focusing on one factor -land values or on one tax -rates I think is a mistake.

        2. Workers that have access to more places of employment in a given travel commute -ideally 30 minutes but benefits exist up to 1 hour, are associated with higher productivity and higher real wages…

          …and higher rents. If you look at the data shown improved public transport makes accommodation less affordable and increases rent. Yes, it also increases real wages and these people are able to afford the higher rent payments required to live in places with supreme access to public transport. Ultimately the only way to target these people with taxation is to include the tax in their rent, charging rates on the property is the only way of taxing this public benefit.

          A fuel tax has the supposed benefit of capturing people who choose not to use public transport (and much has been written here about this benefit), but rates also do this and do it better. A fuel tax has a big problem in that it captures people who do not benefit from public transport (they might work night shift, be commuting in odd directions, be poorly skilled or whatever). These people can choose to live in low value places where they do not have to pay as much rent/rates, but they cannot avoid a fuel tax.

          Since the government is holding out (perhaps they think raising taxes to subsidise Auckland property prices may not be popular?) against the council demands, we are luckily being forced to adopt the fairest possible system.

        3. Motorways certainly degrade the areas through which they pass as do metro railways but their negative impact of the latter is usually considerably less. Both are a means of transport and metro rail is more efficient where there is a well designed system c.f. 1 to 1.2 persons per car or outrageously heavy SUV. The NZTA is after all NZ’s Transport Authority but chooses or is directed to spend all its money on roads, to the livability or aesthetic detriment of Auckland and especially the inner and mid-city areas.
          If some land values are enhanced by metro development, then so be it.
          I stand by my contention that the NZTA/ Government should pay the total cost of the CRL right now.

        4. In reply to unaha-closp above: But here we have the Auckland Council adding a PT levy to ratepayers, who may or may not use the services???

        5. The contention (backed up by the data shown here) is that an efficient public transport system will increase the value of Auckland property. So even if a ratepayer never uses a train their property will increase in value in line with their proximity to Auckland and its CRL.

          Only if the property is on Great Barrier…

        6. You are aware of the difference between “uses” and “benefits from the use of” right?

          Extreme example being that I would benefit if I used the motorway while 80% of current motorway users switched to using the train.

        7. You are aware of the difference between “uses” and “benefits from the use of” right?

          Extreme example being that I would benefit if I used the motorway while 80 percent of current motorway users switched to the train.

      2. The source of motorway funding is (indirectly) the users. The problem with funding rail by user charges is you cant raise enough money this way.

    2. Even though I don’t own property, I’m not as optimistic as you about financial collapses. The recent experience from countries where housing bubbles collapsed has been that young people and low-income people suffer the most. They’re the ones who lose their jobs first, or who can’t find jobs at all. That has long term “scarring” effects on people’s earnings and prospects for mobility.

      By way of example, take a look at changes in real wages by age group in Auckland since the GFC:

      Auckland house prices levelled off after the GFC, but because real incomes for young workers actually _fell_, they were left worse off. And since house prices tend to start rising much sooner and faster than wages for young workers in the economic rebound after a recession, they’re (we’re) doubly fucked.

      Basically, liquidationism has been a flawed philosophy since Hoover’s Treasury Secretary, Andrew Mellon, espoused it in the depths of the Great Depression.

      1. I have had this discussion with a former senior Reserve Bank employer. It is his opinion that a housing market correction would cause short term pain as property owners had a negative wealth effect -lowers consumption, plus issues with financial stability and whether banks would continue to lend, especially for the housing/construction industry. But in the long run lower and stable house prices would allow the Reserve Bank to lower the OCR which would lower our exchange rate. These two facts would boost our productive exporting economy. Further lower housing expenditure would allow future generations to spend more money/time on personal/family consumption. Overall reversing the housing bubble would be positive for the economy.

      2. I think there is also different types of housing market corrections. There is the Spanish and Irish type one based on speculation and building of property in areas not related to the underlying productivity of the regions. So estates in a bog in the middle of Irish nowhere or endless Spanish apartments near the sea to be sold to cold northerners. The boom in prices and construction in that sort of bubble was always going to end badly.

        But a construction boom of affordable housing to escape an economic depression in a genuinely productive area, with a genuine housing need doesn’t seem to have such a bad end. This was Englands/London experience in the 1930s with private housing around publicly provided transport infrastructure and NZ’s experience with state housing and transport infrastructure in the same period.

        1. That’s the problem, though: prior to the crash, it’s quite difficult to tell who’s got a sustainable economic model and who’s engaging in Kaupthinking:

          If you go back to the mid-2000s, many economic commentators and politicians were quite impressed by Ireland’s economic miracle. “The Gaelic Tiger”. When the recession hit, things didn’t look as great, obviously. But who predicted that in advance?

          Home-building programmes in the Depression definitely have some lessons for us today. One is probably that some direct public involvement in housing development is desirable to even out the boom/bust cycle in housing production.

        2. Peter I think there is unmet housing needs in NZ. When I talk to working families who are renting houses that have ice on their windows in Christchurch winters or read about houses that are so overcrowded and cold/damp that NZ has incidences of housing related diseases not seen elsewhere in the developed world I see a genuine problem. I don’t see providing affordable housing with all implications regarding extra infrastructure as being about growing forever.

          In any case, if people need to be housed somewhere in the world. NZ is not a bad place. Done right NZ housing could have a very low environment footprint.

        3. Agreed. We’ve definitely got some big issues, especially public health issues, arising from a combination of inadequate housing stock and a tail of low-income households.

        4. Surely another factor though is that high house prices are one of the few undesirable things about Auckland, especially for young people.

          If Auckland house prices adjusted so they were only say 20-30% higher than Christchurch or Wellington, wouldn’t that then spur even greater internal migration? I would say so.

          So even if prices were to drop, that may not necessarily be a bad thing for Auckland economically as it will grow and create more jobs. And of course a large, relatively dense city like Auckland is very efficient as an economic unit.

        5. Goosoid I think that Zipf’s law best describes the migration patterns and growth prospects of our various cities. That a cities rank order determines its size. Something like the 2nd biggest city will be 1/2 the size of the first, the 3rd biggest city will be 1/3 and so on.

          Perhaps the reason for this is people search for the best combination of amenity (value) versus cost for their needs within a city and they also do the same between cities. And like within a city this results in a downward sloping land cost curve from centre to fringe it results in an ordered decreasing size function between cities.

          I am a big fan of Tiebot sorting, that something like that is going on. I believe that instead of discouraging this effect we should give more autonomy to our cities so they compete with amenity/cost. That if we did this then kiwis would have more affordable high amenity choices to live the sort of life that they value.

        6. Zipf’s law! One of the great enigmas of economic geography.

          In their excellent book on new economic geography, Fujita, Krugman and Venables took a look at a few alternative explanations for Zipf’s law, including the idea that urban growth rates were (basically) randomly selected from a normal distribution. I recall that they concluded that while there is undoubtedly pattern to city size distributions, we don’t have a convincing explanation of _why_ that distribution arises.

          In other words, Zipf’s law describes an empirical regularity but is not especially useful as a predictive model as it describes no causal mechanism.

      3. There are things in our favour. When property prices collapsed overseas they were nationwide, destroyed jobs in the construction industry and placed the banks in extreme jeopardy.

        Here the boom is just Auckland and the rest of the country isn’t having one, except for Christchurch where the rebuild will continue to provide full employment for young people regardless of the situation in Auckland. The construction industry in Auckland isn’t in overdrive, there aren’t a masses of construction jobs for young people to lose in this city. NZ does not have local banks that would need bailing out by the state, our banks are Australian and in the event of them having difficulty the absolute most we are ever going to do is protect some savings accounts.

  6. The problem with this analysis is that land prices are directing related transport provision. I don’t think there is a one-way causation, it is a complex two way system. Old cities were built around natural harbours and navigable rivers because these natural features lowered the cost of transport. Manhattan’s plans were based around the horse drawn omnibus. Then new technologies -bicycles, steam trains, elevated trains (NY), subways (London), elevators, automobiles, motorways, bus expressways have all changed the equation. Reshaped urban development in its three dimensions -X, Y and Z.

  7. I wonder what the health costs are for the different transport systems, people seem to be turning to diesels, that stuff is deadly, I served an apprenticeship as a marine diesel engineer and we were warned about handling it (don’t touch your self when going to the toilet), you washed your hands before going if you had handled the fuel or old engine parts, testicular cancer is real danger, so how much is it costing to run our transport system really when you factor in the pollution as well.

    I saw a report on the rate of testicular cancer in firemen and I have a feeling they use diesel in there fire drills.

    Has any one got the total cost of oil imports, the only figures I can find are for 2010 when we imported nearly 100,000 barrels a day, if we were still importing that amount it would be costing this country US$2,190,000,000. per year at US$60 barrel that’s nearly 3 billion in NZ currency and with the cost of fuel dropping we are importing more now than 5 years ago so we must be getting through over 3 billion a year in oil imports, and how much of that goes on cars as well as the billions spent on roads of nation significance, when will politicians see you can’t fritter away energy on none productive uses that need maintaining at a time in history when we are at, or approaching the limits of growth.

      1. Thanks John, I didn’t realize it was that high, I wonder what percentage of that is being burnt on city streets.

    1. So, therefore from a pollution and foreign exchange angle it makes sense to have vehicles moving and not stationary. Speed bumps and poor use of current infrastructure must be costing in health and $$. Anything that makes all forms of transport FLOW has to make sense surely? Anyone who bleats on about pollution can not in all honesty support impeding vehicular flow? The two together do not make sense. As for the move to diesel over petrol, times have changed, and modern diesels have additional filtering, etc and along with the added economy of the fuel type will continue to be sought by those who have to use vehicles who wish to minimize $$ cost. Human nature.

      1. “Anyone who bleats on about pollution can not in all honesty support impeding vehicular flow?”

        You’re assuming that vehicle use is an exogenous factor – i.e. that people will drive the same amount regardless of how expensive it is or how fast/convenient it is relative to the alternatives.

        That’s simply not true. All the research suggests that providing more vehicle capacity induces more driving. (See eg here: Car use is endogenous to road design. So enabling MOAR FLOW can increase vehicle emissions by increasing total vehicle use.

      2. My argument against the car is that it produces nothing, it is a user. NZ is not an industrial nation so why do we use so much energy in comparison to other none industrial countries, we depend on exports from agriculture and milk the rest of us burn up over seas funds and produce very little.

        The car is a dead end road and if we don’t find alternatives while we still have the resources, once resource depletion arrives it will be to late, it takes energy and years to change over to renewable that use what the world provides on a yearly basis, we might have left it to late but we need to try,

        Not that I think we will run out of oil, just that we have used the easy stuff and getting close to the down side of the extraction cycle, fracking has lifted production but is expensive, we need a better way.

      3. From a pollution and foreign exchange angle it makes sense to have low-cost, low-emissions alternatives to driving. Ergo, public and active transport.

          This shows how the EIA have worries about the future of oil and it’s price, I think for a secure future we need to change to renewables, we are a lucky country with a low population and ample energy from sunlight, rivers and wind to tap.
          Unfortunately we have a government that thinks the future is in road transport, if fuel prices rise who will be on the roads, one effect of higher oil prices in the past has be detrimental to the world economy, if the world can’t afford higher oil prices to cover the cost of fracking, tar sand and deep sea oil we will be back to 30% less oil by 2035 if the decline from mature oil fields can’t be replaced, we should not lock ourselves into such an insecure future.

  8. Space-hungry they are. Starting at your home.

    Suppose a car is not required for getting around.

    Then a lot of those town house developments could have a little green space in their courtyard instead of a car park.

    I was in a Wellington suburb a while ago (the kind with the rectangular street grid + tightly packed houses). It got me thinking. All the space in front of those houses was taken up by parking space. It could be a little front yard instead (and maybe it was before everyone bought a car).

    And think about how much % of your floorspace is taken up by your garage.

    1. Think about the capital savings for the householder if they had a choice of two neighbourhoods?

      One which typically had two cars, two car garages and an extra wide driveway.

      The other being a neighbourhood where the norm was one or even none of the above.

      Car -$15,000?
      Double garage -$30,000
      land for garage and driveway (20% of toal) -$50,000

      Imagine if some of the private capital instead was replaced by public capital in the form of fast ROW PT -either express busways, light rail or heavy rail, plus bike lanes and footpaths for fast easy access to the stops/stations?

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