The anticipated capitalisation effect of a new metro line on housing prices

Housing units with closer access to public transportation enjoy a higher market value than those with similar characteristics but poorer access. This difference can be explained by the lower cost of transport to the main workplaces and shopping areas in town. For this reason, investments in public transport infrastructure, such as building a new metro line, are capitalised totally or partially into land and housing prices. This work empirically analyses the degree of capitalisation into housing prices of the benefits of the new Line 4 of the Santiago metro system, which began operating in December 2005. We focus on anticipated capitalisation into housing prices at the moment construction of Line 4 was announced and at the moment information on the basic engineering project was unveiled, identifying the location of the future stations. We use a unique database containing all home buying and selling transactions in the Greater Santiago area between December 2000 and March 2004. The results show that the average apartment price rose by between 4.2 per cent and 7.9 per cent after construction was announced and by between 3.1 per cent and 5.5 per cent after the location of the stations was identified. These increases were not distributed evenly, but depended on the distance from the apartment to the nearest station. An indirect effect of this kind of capitalisation is that property tax collections will increase if property is reappraised following the price rise. This effect is not negligible in magnitude and could represent 11 to 17 per cent of investment in the new metro line. This raises an interesting discussion on how the metro network extension is financed.