Tuesday, January 29, 2013

The impact of Metro 4 on property prices and economic activity

by Horn Miklós

Metro 4 despite still being in the construction phase seems to be an important determinant of flat prices and future economic activity in Budapest.

The construction of the new metro line (Metro 4) in Budapest – running from southwest to northeast – has been in the centre of attention for the last couple of years in Hungary. In this short blog entry I will discuss the possible effects of the construction and the planned completion of the new metro line by March 2014 on house prices and economic activity.

Transport developments do not necessarily have to link previously unreachable areas to central ones, sometimes they can just provide new, alternative ways of transportation which is the case with Metro 4. The new metro line running from Kelenföldi railway station to Keleti railway station (with possible extensions on both ends later) will cover a transport corridor that is already associated with the most passengers. Despite this, construction does seem to have a significant effect on property prices – especially in relatively poor neighborhoods according to studies. Both distance and time costs will be reduced for individuals using public transportation; traffic and congestions are also expected to decrease. A slight increase can be anticipated near the ends of the tracks though where the building of future parking lots is planned. A transport study shows that the metro construction will hopefully result in 90.000-100.000 less individual car travels a day in the capital.

The unopened metro line already has a visible and significant effect on flat prices. Properties that are closer to metro stations have higher offer prices ceteris paribus, indicating causality between the proximity of public transport and flat prices. No such effect of accessibility can be demonstrated for rent levels as the metro line is not yet available for public use. An estimation of the magnitude of the effect mentioned gives us around a 2.5% increase in property offer prices that are located near a metro station. These facts are backed up by theory: if we interpret the new metro line within the framework of the Central Business District (CBD) monocentric model we see that the travel cost is a trade-off against rents and population density when moving towards the suburbs from the CBD. Since the construction of a new metro line basically reduces travel costs it is not surprising that property prices are therefore raised – upon completion rent levels are likely to increase as well.

The property price increase has a rippling effect on to economic activity. Plans for the renovation of station surroundings are already submitted e.g. Móricz Zsigmond circus will gain a more central role as it gets connected to the shopping centre and market hall nearby. Regional side effects are at work: everywhere in the world metro stations attract new investments mainly from the commercial and business sectors. The value changes, if large enough, will generate investment and development decisions. Therefore the property market can act as a channel for economic and social changes that in the long-run might change technological and economic trends – and even the competitiveness of Hungary – to which flat prices would react with an even bigger increase. From a pessimistic point of view the extent of this effect is questionable. Since, as mentioned earlier and shown on the figure, the new line mainly serves as a new way of transportation on an already busy road, the result is that the explained positive effects might not be as strong as they could be, should the line be laid down for example in further outlying areas – which could make the improvements of public transportation much more efficient.

The effect on property prices depend on other factors as well; for instance, barriers at the stations, P+R car parks etc. can also contribute to rising flat prices. Yet, there are not many negative spatial externalities associated with living near the underground on the long-run as no noise pollution is present and changes to the urban landscape are not substantial. On the short-run construction works can be viewed as a burden, but their effects on flat prices – even though negative – are not significant. In conclusion we can say that the construction of the Metro 4 in Budapest has started boosting the property market – flat prices have already increased – and opening the space for new investments for which the extent depends on several factors discussed earlier. Once the metro line is available for public use it can be suspected that a rapid increase in rent prices will follow.


Post a Comment

Twitter Delicious Facebook Digg Stumbleupon Favorites More