In comments to a recent post I wrote reviewing recommendations from the Australian Productivity Commission’s review of public infrastructure investment, reader Brendon Harre raised an important question about transport cost-benefit analysis (CBA). He commented that:

“the benefits of providing a grid of urban transport options (without mode bias) in advance of development in order to keep land, commercial and residential property affordable is not measured”

This is an important issue that’s worth careful consideration. As a best guess, I think that Brendon’s point isn’t quite true. In a roundabout way, transport CBA does capture benefits associated with enabling development. However, the modelling tools available might over- or under-estimate the magnitude of those benefits in some cases.

Let’s start by reviewing how transport CBA works in New Zealand. Here are the key steps:

  1. A transport agency or council comes up with a land use forecast – i.e. a rough idea of where people are going to live and work in the future.
  2. The transport agency then identifies two (or more) futures scenarios for the transport network in the area. For example, they may consider one scenario in which no new roads were built, and one in which a new highway is built at the edge of town.
  3. The agency then models the transport network under the fixed land use forecast and multiple transport network scenarios.
  4. Based on the modelling, it then calculates how travel times (and vehicle operating costs, emissions, etc) differ between the scenario. It sums up the reductions in travel times (etc), multiplies them by the average value of time, and then uses the resulting dollar value as the numerator in a benefit-cost ratio (BCR).

This procedure obviously bears little relationship to what we observe in practice. In reality, there is significant endogeneity between the availability of infrastructure and land use outcomes. In other words, if you build it, they will come, and vice versa. You can’t assume that land use will remain fixed if transport options change!

Source: Alain Bertaud
Source: Alain Bertaud

Another way of saying this is that rather than “banking” travel time savings from wider or faster roads, people tend to “re-invest” them into other things, such as living in a larger or cheaper house in a different location. (Or re-scheduling trips from off-peak times, shifting modes from PT, walking or cycling, etc.) Public transport is different, as it doesn’t get congested, but the principle is somewhat the same – speeding up journeys allows people to travel more.

Economists call this phenomenon “induced traffic”. I’ve previously discussed this phenomenon from a slightly different angle, focusing on the implications of induced traffic for how we manage and invest in road networks. I’ve argued that we should stop telling ourselves the lie that increased road capacity will ever “fix” congestion and accept that all we can do is give people alternatives to participating in congestion and implement congestion pricing to free up the roads.

However, I think it’s also worth considering what induced traffic means from a housing supply perspective. It’s useful to start by thinking about how individuals might respond to the opportunities created by new transport infrastructure. Let’s use the City Rail Link as an example, as we’ve got a good idea of what it will do for travel times:

West-Midtown-GZ

Suppose I’m currently living in Morningside (I’m not, but it’s a simpler example) and facing the following costs for transport and housing:

  • Rent of $250 a week, assuming I’m flatting
  • Public transport fares of $30 a week, as a single journey to Britomart costs $3 with a HOP card
  • Travel time costs of around $130 per week, assuming that I value my commute time at around $20 per hour. It currently takes around 40 minutes to travel from Morningside to midtown by train, including the walk at the end.

Now let’s consider what will happen when CRL is done. My travel time will be cut dramatically – after CRL, it will only take 15 minutes to commute from Morningside. This is a big saving in travel time. Under these assumptions, CRL will make me better off by around $80 a week (i.e. ~4 hours saved * $20/hour).

However, I’ve also got the option to live further west in search of cheaper housing. Let’s say I choose to move to Henderson, where I pay a bit more in train fares (around $4.80 per trip) and save a bit of travel time relative to my old location. This only makes sense to do if it enables me to save at least $80 in rents for a similar dwelling. Otherwise, moving further out has made me worse off than simply staying in place and “banking” the travel time savings.

What we learn from this example is that the perceived benefits from relocating following the construction of new transport infrastructure, including lower housing costs or better quality housing, should be roughly equal to the added travel time cost of doing so. Economists describe this concept as the “spatial equilibrium” – i.e. people trade off housing and transport costs. As I found when looking at housing and commute costs in NZ cities, we can observe this trend empirically.

(That being said, there are reasons to think that moving further out in pursuit of cheaper housing is not necessarily a great idea. In The Happy City, Charles Montgomery argues that people overestimate the benefits they get from a bigger house, and underestimate the misery of longer commutes. But let’s set aside the impact of cognitive biases for the moment…)

The upshot of this is that, the standard approach to transport CBA actually seems to capture many of the benefits of new housing supply following transport infrastructure development. This sounds perverse – didn’t I say that transport models didn’t reflect reality very well? – but it makes sense when you think about how individuals make decisions about where to live and how to get around.

However, there are two caveats to this point. The first is that individuals don’t internalise all the costs (or benefits) of their location choices – there are externalities. If one location is better at generating positive spillovers in production or consumption (“agglomeration”), cheaper to serve with publicly-funded infrastructure, or responsible for fewer greenhouse gas emissions, it might be better to build infrastructure that will encourage people to live there. This is captured imperfectly in transport CBA at present – but it doesn’t have much of an impact on housing supply.

A second, more subtle issue is that our capital budget may be too constrained to deliver enough transport capacity to enable a sufficient supply of housing. For example, we may be pursuing a costly and land-intensive approach to supplying peak transport capacity that results in diminishing returns from investments. If that’s the case, we need to ask whether we have cheaper opportunities to add capacity to the transport network. (Or, alternatively, start raising taxes, which is always a popular option.)

What do you think about the spatial equilibrium in our cities?

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29 comments

  1. “Charles Montgomery argues that people overestimate the benefits they get from a bigger house, and underestimate the misery of longer commutes.”

    Agree with this, in our younger years when Auckland congestion didn’t really exist (a relaxed 30 minutes from Papakura or Henderson to the city) many moved to the far flung suburbs to get the quarter acre paradise or even lifestyle blocks (at various times I had one or other) and life was relative bliss. We all knew our neighbours, kids all grew up together, and everyone pitched in to help each other build fences, lay driveways etc. Then from the mid 2000’s the time taken to commute started to double (especially if there were any issues like accidents, breakdowns, etc) and the routes taken started to have more frequent stops. It was (IMHO) the time when lots of us wondered why we had to leave earlier each morning and why we were arriving home knackered each night, and often in the dark for most of the year. The big question on our minds became “how do we shorten our work day” (work plus commute) and ‘working from home’ started, which actually made us all question our situations even more, as on the days we actually had to commute it was even more painfully obvious that the gentle drive of the 80’s and 90’s was now a much hated chore, leaving us tired and grumpy. The result of all this was the quest to find properties closer in that suited our families and needs at the time, and our desire to shorten (actual or imagined) our commute times and frustration.

    This started the pressure on central suburb property. Add in unfettererd immigration and the rest is history.

    This is not a car vs PT comment, PT from those areas takes just as long as driving if not more if transfers are required. More a simple comment on how our working days have all become longer and the pressure has increased on central city property from just one angle. I pine for the lifestyle block peace and quiet and space, but also remember the commute angst.

    1. Interesting comparison between living in Henderson or Morningside, but very arbitrary. A person living in the CBD and working in Henderson would be better off living closer to Henderson. It works both ways, and simply highlights that people should live and work in the same area. If that area is constrained it will cost more than if it were unconstrained. That’s why someone working and living in Henderson will have a considerably cheaper lifestyle than someone living and working in the Auckland CBD.

      High commuting costs are caused by over-development of a given area. If you create a need for hundreds of thousands of people to be in the same small area at the same time of the day, those people are going to have to choose between two high cost lifestyles. They are either going to pay a lot for a small living space close to work, or pay a lot in commuting costs from further out. Whichever one works out cheaper is the lesser of two evils, rather than an ideal.

      If you want a low cost lifestyle, stay well clear of a need to be the CBD every day.

      *edit* not intended to be a reply to Ricardo.

      1. What if someone working in Henderson marries someone working in the CBD?

        What if someone with two kids going to school in Henderson loses his job? Move to wherever he finds a new job in the middle of the school year?

        What if someone works in the CBD but just doesn’t like apartments?

        And so on. One of the advantages of a city over a small town is that you can look for a job in the entire city (or at least large part of it). You have much more choice than in a small town. But the job you like most may be in a different part of town.

        And big companies will always try to move to the CBD, because that’s where they have the best access to the job market.

    2. Ricardo you describe well two phenomena; Auckland growing up and into an actual city, much lamented by Geoff who neither likes nor understands what a city is, and the non-linear function of traffic congestion. Which is to say that the drive-only city infarcts suddenly and permanently. It reaches its limit of utility and must be complemented with urban systems urgently at this point, especially if none have been provided along the way….

      1. A complimentary approach would be nice. Unfortunately we seem to have antagonism against suburban development. Suburbs are much closer, more environmentally friendly and better agglomerates of people than lifestyle blocks. Yet our policy is to encourage urban development and rural living only, not a complimentary approach at all.

        1. You keep using these words “we” and “our”. Could you be more specific about who, precisely, is advocating such a thing?

          1. “Our” city Auckland’s policies driven by “we” citizens of Auckland. We have extensively grown our rural living population and are beginning to intensify our central isthmus, but are preventative of new suburban development.

            Incentives have been put in place that deliver the outcome of large scale rural living and this was done on the back of almost no one advocating it.

          2. Simplify the housing market to 3 substituting goods – Urban, suburban, rural. You know that these have respectively high, medium and low values; and that higher value areas can be enhanced by better civil infrastructure. In a normal system there would be a graduation of price reflective of value derived from utility.

            In Auckland there have always been restrictions on urban living that made suburban and rural living more attractive. Then somehow we decided that we needed restrictions on suburban development. There are 3 substituting goods – we restrict the sale of two of them, the result is we get way more of the 3rd.

          3. ““Our” city Auckland’s policies driven by “we” citizens of Auckland.”

            I suppose I’d be wary of blessing legacy urban planning policies with democratic legitimacy. While I wasn’t there when they were set, I suspect that elected representatives or voters were probably not presented with the full range of options and sufficient cost-benefit analysis to make an informed choice.

            That doesn’t necessarily mean that such policies are bad or that they wouldn’t be chosen by voters – the point is that many of them weren’t fully tested.

  2. Your example doesn’t include the fact that once the travel time to Morningside is reduced more people will want to live there so the rent of $250 will increase. Higher rent means a higher property prices. In effect the benefit of the reduced travel time is captured in land value. The winner is the owner of the land. If all you can afford is $250 then you will have to move out.

    1. Following that logic through further – if the land values rise and the planning rules allow, then this provides a platform for intensification in Morningside. Denser housing, in terms of your weekly rent, should see Morningside still remain affordable for some – just not renting a single storey dwelling on a large section because the land is now too valuable to continue in the same use. Density in Morningside creates more demand for the train services, which is exactly what should be happening around RTN corridors.

  3. “However, there are two caveats to this point. The first is that individuals don’t internalise all the costs (or benefits) of their location choices – there are externalities. If one location is better at generating positive spillovers in production or consumption (“agglomeration”), cheaper to serve with publicly-funded infrastructure, or responsible for fewer greenhouse gas emissions, it might be better to build infrastructure that will encourage people to live there.”

    And how do we achieve that? Firstly we have to acknowledge the actual effects of the infrastructure, by correcting this misconception.

    “…it doesn’t have much of an impact on housing supply.

    Greatly beneficial public infrastructure makes the price of the positive agglomeration land rise to high value. Price is a primary driver in housing supply. If prices shoot up in one area, people will buy a worse option elsewhere.

    As we grow a great infrastructure in the centre, the price of the centre rises. We must then acknowledge the dynamic and provide choices which are least bad for people to move to in greenfield suburbs with moderate service PT and good civil infrastructure at the fringe.

    1. Or allow them to live on less land in the same location for the same price. Unfortunately many Aucklanders refuse to allow the poor this choice.

  4. Surely the solution to look at is the super transport supply option. Create so many housing options up and out. All with good roads and PT. So that the location amenity is not capitalized into the site price.

    I am not convinced this article demonstrates transport provision that takes into account housing affordability. It seems to rely on a top down forecast on demand that is then through the planning and infrastructure provision process dictates supply. If the forecast is wrong then a shortage and price rises may result.

    1. What we need is a transport system that elasticality responds to demands rather than rations it. So if a suburb grows bigger or intensifies then it gets rewarded by better transport infrastructure. So if Auckland isthmus wants trams it must allow intensification for example.

      1. In my opinion if transport infrastructure was more readily provided then we would have much less NIMBYism. Which in itself would improve housing affordability. This sort of bottom up meets top down social contract would be difficult to measure by NZTA top down only CBA worldview.

    2. Hi Brendon – glad you’re reading given that your original comment provided the impetus to start thinking this through!

      In response to your further comment, I’d argue that existing transport CBA procedures probably provide an indirect measure of housing supply-related benefits. However, the resulting outputs don’t give a direct measure of how much impact any individual project (or package of projects) will have on housing prices.

      In my experience, transport CBA’s fixed land use scenario is based on the assumption that the Stats NZ (medium or high) population projection will be accommodated somewhere within the region. Sub-regional allocations generally take into account planning regulations, either based on a model of development capacity or drawing upon planning judgment about how many households could be accommodated when rezoning an area. In this context, projects tend to have BCRs above 1 when they improve the accessibility of areas which have (or are expected to have) the potential for increased housing supply.

      This isn’t a perfect approach, but I’d argue that it’s not quite as bad as you think it is!

      1. I am on holiday in Kaikoura so cannot reply in full. There is a paper by Alan Bertaud publish end of last year that explains affordable housing needs a balance of top down and bottom up processes. I do not think we have that balance.

        Peter thanks for the article though : )

        1. I’d argue that consistent cost-benefit analysis is one of the key “bottom up” methods for ensuring that urban policies are fit for purpose. If it’s not possible to demonstrate that the benefits of an individual policy exceed its cost, we should consider changing it. If this logic is applied everywhere, it’ll leave us with a set of policies that more or less make sense and don’t excessively limit housing supply. We can then use top-down modelling to figure out whether the overall outcome is reasonable.

          I’d stress the importance of consistency – NZTA’s evaluation procedures might be unrealistic in some ways, but at least they allow us to compare like with like when prioritising investment.

  5. “What we learn from this example is that the perceived benefits from relocating following the construction of new transport infrastructure, including lower housing costs or better quality housing, should be roughly equal to the added travel time cost of doing so.”

    Hmm, not 100% sure about this. I know what you are saying, but: if someone moves instead of banking their savings it means they get more value from moving than from the travel time savings attributed to them based on the assumption they stay in the same place. How much more is the question that needs to be answered – i.e. what is the additional consumer surplus over and above the assumed travel time saving assumed. Sure market prices will re-equilibrate after the building of the new infrastructure so that the travel time vs cheaper housing trade off is equal, but this doesn’t mean that the change in circumstances is neutral for everyone who changes their behaviour as a result of the project.

    Countering the overall argument that CBA might underestimate benefits however is that the travel time savings are not necessarily real anyway because of induced demand. So the benefits of an unpriced road may be less than assumed if the benefits from the induced demand (higher throughput) are less than the assumed travel time benefits. There is no reason to believe the benefits of higher throughput would in fact be higher.

    1. I have to admit that I’m still thinking through these issues – as you have observed in the past, there’s a short-run vs long-run dynamic at work. (No reason to expect LRAC=SRMC!) I’ve been meaning to do some further reading when I get some free time.

      My gut feeling (which could be wrong) is that existing CBA techniques understate benefits of projects that encourage people to locate in places that require less car use, as car use tends to be associated with unpriced negative externalities, and vice versa.

      To put it another way, if you’re inducing demand on networks that don’t get congested (e.g. rapid transit), then travel time savings will be (roughly) equal to consumer surplus gained from longer trips. But if you’re inducing demand on congestion-prone networks (e.g. roads), people’s attempts to “re-invest” travel time savings will make others worse off.

  6. In your example of Atlanta vs Barcelona, Atlanta’s population (according to Wikipedia) is not 2.5 m but between 4.5 and 6.1 m depending on how far out the boundary is drawn.

    I recently met someone who was brought up in Barcelona. She commented on how small the housing was.

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