Traffic congestion and housing prices

NUMBERS GAME: The results of a study conducted by the writers using data from 2002 to 2012 show that the average peak-hour expressway speed does indeed have a sizeable effect on the location premium charged for housing. PHOTO: THE STRAITS TIMES


    Apr 04, 2014

    Traffic congestion and housing prices

    DOES traffic congestion affect the price of housing?

    Yes, traffic congestion can impact a flat's price but whether the impact is positive or negative depends on how far the flat is from the Central Business District (CBD).

    It is well known, by economists and laymen alike, that housing located in city centres is generally more expensive than housing on the periphery. Much of this price differential, or location premium, arises because the city centre is where most economic, cultural and recreational activities take place.

    In Singapore, housing in and around the CBD also enjoys an extremely high location premium.

    For example, for the period 2002-2012, the price of a private resale flat in Clementi was on average about $490 less per square foot (psf) than one in River Valley, which is about 9km closer to the CBD.

    Resale prices were even lower in Choa Chu Kang, which is an additional 5km farther away from the CBD than Clementi and nearly $625 psf less than in River Valley.

    Because much of the location premium is driven by travel costs, it is not surprising that this premium changes when commuting costs, such as the price of petrol or ERP rates, change.

    Traffic congestion, however, is an area of commuting costs that has been largely neglected by economists.

    Clearly, the greater the traffic congestion, the longer it takes to get to work. This situation not only imposes a time cost but also a psychological cost. Hence, greater traffic congestion should increase the location premium as the additional costs increase people's willingness to pay more to live closer to the CBD.

    Differences in average prices in different locations, while informative, do not just reflect the location premium. Many other factors also affect flat prices.

    For instance, housing near the CBD might be more luxurious than houses elsewhere. Some areas may be more industrialised than others. Thus, to correctly measure the true causal effect of traffic congestion on the location premium, any analysis will have to remove the complicating effects of these types of factors.

    In our research, we eliminated these factors by using two specialised statistical techniques.

    The first technique compares price changes of flats that are sold at least twice in the resale market.

    The second technique, called instrumental variables estimation, uses variables called instruments that influence traffic congestion, such as the number of expressways in Singapore, but have no direct impact on any other factors that affect housing price.

    In short, if we find that resale prices away from the CBD increase faster than in and around the CBD when there is more traffic congestion, then these statistical techniques ensure that it is traffic congestion, and not other factors, that causes the location premium to increase.

    The results of a study we conducted using data from 2002 to 2012 show that the average peak-hour expressway speed, our measure of traffic congestion, does indeed have a sizeable effect on the location premium.

    A flat 3km from the CBD appreciates 1.5 per cent more than one in the CBD when expressway speed increases by 1 per cent. A flat 10km away from the CBD would see an even greater payoff, appreciating nearly 5 per cent more than a flat in the CBD.

    Conversely, if expressway speeds slow and traffic congestion increases, the price of housing in the CBD will increase relative to housing in the suburbs.

    It is informative to consider what these numbers mean for particular flats.

    An increase in peak-hour expressway speed from 63kmh, the recent historical average, to 64kmh results in housing in Kallang, about 3km from the CBD, appreciating by $17 psf more than housing in the CBD.

    In other words, a 1,500 sq ft flat in Kallang would see more than a $25,000 increase in value, compared with a similar flat in the CBD, simply because of the change in expressway traffic.

    In Ang Mo Kio, about 10km from the CBD, prices would increase by $27 psf, and a 1,500 sq ft flat would appreciate by about $40,000.

    Due to data limitations, we were not able to measure the impact of traffic congestion on HDB housing. Nevertheless, the theory would suggest that HDB resale prices should follow a similar pattern.


    The first writer is a senior lecturer and the second is an associate professor in the Department of Economics, National University of Singapore.

    This is an excerpt of a piece that appeared in The Straits Times.