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.

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Count István Széchenyi and the Chain Bridge

Count István Széchenyi and the Chain Bridge

by Luca Drucker

The construction Chain Bridge as the first permanent bridge between Pest and Buda caused

the reduction of transport costs and helped Pest-Buda become the kind of centre Count

Széchenyi dreamed of.

If we hear the name of Count István Széchenyi we can recall a bunch of reforms he made in the Hungary of Reform Era: the foundation of the Hungarian Academy of Sciences and the Trade Bank, the National Casino, the introduction of horse racing in Hungary, the Hungarian National Economic Association, the National Theatre... However, in the aspect of regional economics, his most important contributions as transport minister were the steam ships on Lake Balaton, his plans for the first railways in Hungary, his support of making Danube navigable and the Chain Bridge.

Before the construction of Chain Bridge, in the early 18th century Danube could only be crossed between Pest and Buda by ferryboat and from 1767 via a pontoon-bridge supported by 43 boats. However, this bridge hindered the circulation of ships and it was unusable in winter because of debacles. So we can say transport costs were very high between the two cities. The idea of building a permanent bridge between Pest and Buda was relevant, and thanks to Count Széchenyi, the work started in 1939 and the bridge was opened on 20 November, 1849. The bridge was built to connect the two cities he wanted to be unified in the future and be the political, economic and cultural centre of Hungary. 

By that time Pest was flourishing: population grew, centres of trade and money were built, palaces and hotels were raised and cultural life bloomed, too. However, we cannot say this was caused by a historical accident: people invested in Pest because they wanted it to blossom and be the centre of Hungary. 

But if we think about New Economic Geography theory, maybe we can say a little bit more about the consequences of building a bridge between Pest and Buda than just that it connected the two parts of the future capital city. 

This theory is about how people decide on location between two regions with two sectors of the economy. The two sectors are agriculture and manufacturing and manufacturing labour and firms can move between regions but agricultural labour can’t. Migration decisions of manufacturing workers are affected by the wage differences between the regions, but the equilibriums are determined mainly by transport costs. With high transport costs, spreading (production in both regions) and with lower transport costs, agglomeration (production in only one region) will be the equilibrium. 

If we take a look at how population in Pest and Buda formed among the years we can see that after the reforms in transportation, mainly the construction of Chain Bridge, population in Pest grew faster than that in Buda. It is true that the area of Buda is smaller and the first geography of the two cities is different – Buda is mostly built on hills but Pest is on a plain. This is why even in the 18th century people in Buda still dealt mostly with viticulture and wine production and with industry and trade in Pest. However, maybe with the huge decline in transport costs – the construction of the bridge – people did migrate from Buda and from other Western parts to Pest because of the higher wages and better possibilities, so some kind of agglomeration started. 

This is just my theory. It may not be true. Budapest is not exactly the textbook example of this model but it is sure that building the Chain Bridge eased the trade and transportation not only between Pest and Buda but between Eastern and Western parts of the country, too. This project, among the various reforms of Count Széchenyi and followed by even more reforms in the end of the century contributed to Budapest becoming the centre he dreamed of.

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Slavutych: the Future of the Chernobyl Survivors’ Shelter

Slavutych: the Future of the Chernobyl Survivors’ Shelter

by Anastasiia Polner

What associations do you have when you hear the name – Slavutych? Slavutych is a city in Kyiv oblast, Ukraine, the population of which is 24 500 people – this information pops up in the first lines of the Wikipedia article. Nevertheless, the important facts are different. Slavutych is situated only 50 kilometers away from the ill-fated Chernobyl Nuclear Power Station (CNPS), where the disastrous catastrophe happened in 1986 due to the nuclear fallout. It is the youngest city in Ukraine and was constructed to host the survivors of the accident who were evacuated from Prypiat. 26 years ago Pripiat used to be home for thousands of Chernobyl personnel and their families; nowadays it is a ghost city, totally abandoned.

Chernobyl nuclear disaster is considered to be the most horrible in the history of Nuclear Power. Before the accident Chernobyl was producing 10% of Ukraine’s electricity. Today Prypiat and Chernobyl factory are surrounded by 30 kilometers of Chernobyl Exclusion Zone. Even now there are some places on that territory that are dangerous for live beings due to high level of radiation.

Yet, some people still work on the factory to maintain, monitor it for safety reasons and work upon scientific researches. More than half of Chernobyl employees are actually construction workers, building the Shelter, known as ‘Sarcophagus’ that covers the 4^th reactor, where the explosion happened. All those people live in Slavutych. Today, out of its 24 500 citizens around 3 800 work in Chernobyl, even after the remaining processes in the nuclear units were finally stopped and the whole factory was officially shut down in 2000. Before the final shutdown half of the grown up population of Slavutych, or around 9 000 people, worked on the plant. Since the shutdown the city started to find itself in crisis; around 1 500 people already left it looking for better life in other regions of Ukraine.

Let’s look at the situation from the perspective of Spacial Equilibrium model. It analyzes the migration of working force by looking at the dependence between salaries, cost of living, comfort of living (so-called “amenities”) and personal preferences. For example, the model claims that shocks in demand or supply of the labour force and the corresponding changes in wages will be partially absorbed by changing housing prices. Accordingly, local demand for housing can be derived from other factors of the model.

As the counterparts of Slavutych we take two neighbouring regions – Kyiv and Chernihiv oblasts (without the capital city itself), because they are the main areas for people’s migration from Slavutych.

The numbers tell us an interesting story. The average salary in Slavutych is 475 Euro (and almost 700 Euro for those who work at Chernobyl Station) – much higher than the country average value of 300 Euro. The region average salary is also lower at 280 Euro. With such difference in levels of income we might expect higher housing prices in Slavutych compared to neighbouring regions. However this is not the case. With a price of some 500 Euro per square meter Slavutych lags behind its neighbours by some 200-300 Euro.

One reason for that is historical: Slavutych was built in emergency and all people who moved to it, naturally got their apartments for free.

Another explanation comes directly from the Spatial Equilibrium model. On the one hand, according to different researches, Slavutych has some good-quality amenities. For example, the city consistently holds its place among the top-20 wealthiest Ukrainian cities and the top-20 most comfortable Ukrainian cities according to Focus magazine. It scores high in terms of budget spending per capita, number of supermarkets, green areas and sport venues. On the other hand, however, the preferences for living in Slavutych are really weak - virtually non-existent. That is because of poor ecological situation and the constant health risk that the workers are exposed to. As a result and not contradicting the model, average salary in Slavutych is high, whereas housing prices are low relative to average wage and housing prices in the neighbouring regions. Stated differently, it means that workers are willing to move to Slavutych if, and only if, the salaries rise without the corresponding growth in the cost of living.

We can confirm our conclusions by looking at the situation in dynamics. After the shutdown of the plant in 2000 people started to flee from Slavutych, lowering demand for accommodation, putting additional downward pressure on housing prices and confirming our proposition about very weak location preferences.

The future of Slavutych looks obscure. The city has a weak level of business activity, it creates not enough of new jobs annually, and has a deteriorating infrastructure. Finally, the Chernobyl station inevitably will be closed, sooner or later. So, if the city survives in such circumstances, it will happen because of long-term forward-looking policy of reforms and diversification. Slavutych will cease to be a unique place on the region’s map; on the contrary, it should integrate into local business chains and processes. To conclude with, the factor of utmost importance that should be taken into account is the weak preference of people to live near the radiation zone.

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