The Canadian Housing Market in Layman's Terms - Part 5 - Transportation Infrastructure as a Proxy for Housing Prices
“Price is what you pay. Value is what you get.” - Warren Buffet
Canadians like to bemoan house prices, and I’ll admit this has become nothing more than just polite elevator conversation to me at this point.
But the recent (yet again) meteoric rise in housing prices since the pandemic hit is something that is pretty hard to ignore…even for me. I found myself asking whether house prices could persistently keep rising faster than household incomes.
I decided that I needed to go looking for a deeper explanation to refine my view on housing. And I found one rooted in academic rigor.
“…in a growing economy the speed of travel improvements is crucial to the evolution of land and house prices….this condition was satisfied in many countries between the mid-nineteenth century and the mid-twentieth century, but since then the passenger transport improvements have slowed down with major implications for how house prices evolve.” - David Miles and James Sefton - House Prices and Growth with Fixed Land Supply, The Economic Journal, 2020.
The video linked above and the associated paper is pretty dense, so a nice 5 minute summary of this can be found here, courtesy of The Economist.
I want to touch on one aspect of their thesis which is that in the context of a Western city an easy, cost-effective, diverse and speedy transportation network is key in increasing the amount developable land. Otherwise the economy runs up against a fixed supply of land in areas where the good jobs are.
The authors of this paper show that transportation infrastructure has not kept up with the economic and population growth in the rich world’s housing markets, and this effect can be reliably modeled to show an increase in real house prices and rents.
I’m not confident in transportation infrastructure improving to match economic and population growth that is expected to be cradled by cities, especially in North America, so I think this will continue to play an important role going forward.
One should keep in mind that there’s other factors at play here, such as urban densification, that have been employed to counteract this in places like New York extensively.
Regardless, here’s three takeaways here:
The cost of building a house, i.e. the collection of assembled materials placed on top of a piece of land, has not gone up substantially over time. Therefore it is an increase in the land value that accounts for the majority of the rise in housing prices,
Land around good transport links is going to continue to be desirable and therefore it is reasonable to expect housing built on such land to accrue in value at a faster pace than the surrounding city average,
Cities and/or municipalities’ incentive to bring down housing prices will continue to fall since a large portion of their revenue source is property taxes, which themselves are assessed using current house prices.
If the article by The Economist linked above piques your interest, I would highly recommend a broader look at the obsession with home ownership in the rich world and it’s effects on the economy as a whole, also by The Economist. The video below is a great start, and the associated special report can be found here.
Transportation infrastructure is just part of a much larger conversation around issues with urban planning. If this article’s content resonates with you then I would encourage you to go down this rabbit hole starting with the video below and the video series below that as an introduction. The rest of the Not Just Bikes channel is fantastic too.
I also recommend City Beautiful which is run by Dave Amos, Assistant Professor in the Department of City and Regional Planning at California Polytechnic State University (Cal Poly).
