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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Polycentric Moscow: overcoming transport collapse

Polycentric Moscow: overcoming transport collapse

By Anna Bakaykina

Modern Moscow is a classical representation of monocentric city. Approximately 70 % of all workplaces are concentrated in the area of ​​6.5 km from the Kremlin, whereas people mostly live in the suburbs (e.g., the population density of the Zyabliko district, located 17 km away from the city center, is 2.2 times larger than density in Arbat district located 1 km from the Kremlin. This can be explained by the bid-rent theory - moving away from the city center the prices for accommodation significantly decrease. So, a one-room apartment rent in Khimki is almost half that of one in the North-Western Administrative Districtof Moscow ($581.8 versus $1043.37, respectively,

However, this monocentric structure directly causes the severe transportation problem. Everyday a huge flow of Muscovites travels from their homes to the workplaces and the other way round (so-called “pendulum migration”). Along with the underdeveloped transport infrastructure (leading to one of the worst estimated commuting time in the world) and existing radial transportation system, it creates huge traffic jams and metro overload. Thus, every day the capital metro is overloaded by 20 % on average and typical traffic jam lasts 2.5 hours daily (Moscow is 8th in the world in terms of traffic jam duration). The current situation can be characterized as transport collapse.

Several separate steps can be implemented to cope with this problem, but they will unlikely have any real significant effect. Thus complex solution is needed. The concept of policentricity – the formation of several clusters of economic activity within one city – seems to be an effective solution for the Moscow case. Such capitals as Paris, London, Tokyo chose a similar path of development several decades ago by creating new poles of jobs concentration and relieving the historic center. Modern theory in this case is perfectly consistent with the existing practice*.

Permeated with the spirit of the polycentricity and the prospect of becoming a world financial center, the Russian government decided to create the Moscow metropolitan area (“Big Moscow”). This project provides for an expanding more than two-fold in area of the capital (from 1,070 squarekilometers to 2,560 sq km) with the establishment of multiple clusters (including medical, innovative and educational clusters) and relocation of several Federal authorities (e.g. Parliament and Supreme Court) to new greenfield sites. It also suggests the creation of an efficient transport infrastructure, in particular, development of chordwise directions, and putting into operation a total of 23 new metro stations by 2018. Special emphasis will be placed on an improvement of existing public transport system by an introduction of intelligent transport systems, creation of wide range of transport hubs, opening of passenger traffic in the small ring of the Moscow railway and integrating it with the functioning of underground.

Nevertheless, real economic effects from this project remain unclear. In short-term period, it is quite unlikely that there will be any real effect, because a simple change in administrative status of attached territories will not add more incentives to firms to reallocate. And terrain characteristics stay the same: there are still transport problems, and the population density is still low (compared to the "Old Moscow" and other areas of the Moscow region). Concerning pendulum migration, the flows will not change until real improvements in transport infrastructure and the development of chordwise directions.  The only thing that might change the situation in the short-term is the decision to relocate public institutions, but this effect is not likely to be significant because it can only accelerate the creation of infrastructure and this also will take time. Otherwise, the level of wages will stay the same because it depends on the demand and supply on local labor market. As income of people will not change, the level of local prices will not be also affected by this process.

Considering the long-term prospect, changes might occur but they mostly depend on the development of the full range of infrastructure, including social infrastructure (which besides transport includes health, education, housing). Only in this case an overflow of the economic activity from the "Old Moscow" and other areas of the Moscow region will be observed. However, the development of the “Big Moscow” – 90 % of which is currently covered by forests, fields and villages  – will take time and will need to solve some existing issues. For example, it is impossible to create accommodation with the current absence of the proper water supply, for which two solutions have been proposed – to drill wells or to build a reservoir near Podolsk.  But the first will raise the level of prices on accommodation to premium class level (and will be provided mostly by private companies), which of course will not provide additional incentive for people to move there, whereas the second needs direct involvement of the authorities and huge state investments.

Despite the fact that the project itself looks very convincing in solving the existing problem of transport collapse, it is quite unlikely to expect real effect of it in the nearest future. Moreover, any real success can appear only in case of using integrated approach.

* The classical monocentric Von Thünen (1826) model extended later by Alonso (1964), Mills (1967), Muth (1969) and Fujita (1989) lost its position in comparison with emerging polycentric models (e.g. Anas and Kim, 1986), which are able to describe more complex patterns through interaction of agglomeration and dispersion. 

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