Traffic congestion affects commuting costs which impact on housing prices

Traffic congestion affects commuting costs which impact on housing prices
The seasonal reduction from May 31 to June 28 will see most ERP charges lowered to $1 or zero.

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.

Nobel Prize winner Robert Lucas, for example, writes: "Production is centred on the city centre, and people live at differing distances from their jobs. In choosing a residential location, households face a trade-off between expensive land near the centre with small travel times, and cheap land farther out with large travel costs. Everyone who has looked for housing in any city or suburb knows the reality of this trade-off."

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 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 less per square foot 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.

For example, one United States study found that a US$1 increase in the price of petrol reduces the value of the average commuter's home by US$5,000 (S$6,300) relative to a home near employment opportunities.

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 different factors.

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