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Will Ottawa’s LRT Improve Property Values?

Will Ottawa’s LRT Improve Property Values?

Wondering whether Ottawa’s LRT will lift property values? In this post I look at the outcomes suggested by the relevant theories and evidence.

Convenience as the Main Driver of Value

Urban economics 101 tells us that reduced interaction costs are why cities exist and that reduced  interaction costs are the main (arguably, the only) reason why land in cities is more expensive on a square-foot basis than land elsewhere.

What are Interaction Costs?

Interaction costs are what an entity (a person or organization) gives up in order to interact with another entity.

For all intents and purposes, interaction costs are equal to the value of the time a person spends travelling and her out-of-pocket travel expenses, such as gasoline or bus fare.

So, the theory has it that, all other things being equal, a person will pay more to live where their interaction costs are lower.

Is that the same as saying that people will pay for convenience? Not quite.

The take away here isn’t just that there’s value in convenience. It’s that convenience is the primary driver of urban land value.

The Effect of the LRT on Convenience

Before completion of the Confederation Line, approximately 20,000 downtown-bound commuters rode buses into, and out of, the core every hour during peak service. Since the completion of the line, OC Transpo organized its routes so that nearly all of those riders would ride the train into the core. Consequently, there are more transit riders travelling along the Confederation Line than along other major transit routes.

By 2031, the number of people commuting to, and from, the core via the Confederation Line is expected to reach nearly 50,000 per peak hour.

So here’s the simple take away: properties near the new LRT stations are now a measure more convenient for tens of thousands of people than they were before. Given that convenience is the main driver of urban land value, we should expect the values of these properties to increase.

A Bit More to It

Before the completion of the Confederation Line, properties in the downtown core were too expensive for a good number of buyers. As such, even if proximity to the train increases the desirability of a property, the already-high prices of properties near the new stations may dampen the effect that added desirability has on the demand for those properties, which, in turn, may dampen the uplifting effect that proximity to the train may have on home prices.

By analogy, suppose the LCBO was selling a $1,000 bottle of Cristal. For most people that’s too much to spend on a bottle, and so there would likely be few buyers. Now, suppose the LCBO was to lower the interaction cost of the purchase by offering free delivery of the bottle to the buyer’s home. Even with interaction costs substantially reduced, demand for the expensive bottle would probably not increase appreciably: The added convenience isn’t enough to tip the scales in favour of purchasing the bottle.

It’s an extreme analogy, but it makes the point: demand for the most expensive properties near the new train stations may not increase dramatically – even if the interaction costs associated with ownership of those homes decreases.

Having said that, I’ll note that we shouldn’t conclude that proximity to train  stations won’t have any uplifting effect on home values. Rather, we might conclude that the effect will be more pronounced on less expensive properties.

What Does the Data Predict?

The LRT launched on Sept 14th. To date, the sale history hasn’t provided a clear indication that homes near the LRT have experienced a substantial uptick in value. However, that doesn’t mean it won’t happen.

John Herbert of the Ottawa Home Builders’ Association predicted the value increase would take years to affect market prices.

On paper the increase seems very likely… it could take years to see results and will depend upon the consumer.

How Much of an Increase Should We Expect to See?

The City of Ottawa commissioned a study to predict the economic impact of the construction of the Confederation Line. That study looked at how the creation of light rail transit systems in similar cities had affected property values near the light-rail lines.

The study predicted that the prices for homes located 0.25-0.5 kilometers from the train stations increase, on average, 19.6% more than the values of otherwise comparable homes.

The study also noted that the value uplift associated with proximity to a train station is still detectable, but less pronounced, among homes located as far as 1200 meters from a station.

Conclusion

The theory and evidence both predict that proximity to the LRT will positively affect home values. The creation of the LRT will have the most pronounced effect on the values of homes located between 250, and 500, meters from train stations. Confederation Line ridership is expected to increase substantially over the next decade, and home values near LRT stations should continue to increase accordingly.

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John Castle

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