Wednesday, October 14, 2009

Why housing's 'Zone 1' price premium is no longer justified

Estate agents and property investment spruikers will tell you that one of the benefits of buying an inner suburban home is its cheaper fares (for city commuters) than a place beyond about 15km from the city. Anecdotally many buyers and renters seem to value this criteria as well. 'Located in Zone 1' is perhaps not quite as coveted as being in the catchment of a so-called 'good school' but it's not far off, especially for childless couples.

Three years ago I demonstrated out that the higher mortgage payments of a dearer inner suburban home generally outstripped the savings in fares. Unless the Zone 1 suburb 14km from the CBD had amenity benefits that the Zone 2 suburb 16km out didn't have, the fare difference is not worth paying much of a premium for if buying a home.

To put it in dollar terms, the difference in monthly fares for a full fare passenger is about $60 per month or $15 per week. Double that for a two income household (both taking public transport to a city job) and half that for a concession passenger. $15 per week is just under $700 per year, or the same as 7% interest on $10 000 owing. And $10 000 is trivial where average house prices are over $100 000 different between adjoining suburbs on opposite sides of the zone divide.

Has anything changed in 2009? Average house prices are generally higher than in 2006 but interest rates are lower, so the difference in mortgage payments between then and now even out.

While we have a metropolitan fare system that generally works well, don't let anyone tell you it is immune from change. For example, in the last 30 years we have seen section-based fares with fine increments, one type of zone system, its abolition in favour of a neighbourhood system, another type of zone system and lately its significant modification with new flat fare tickets.

The two major fare changes in the last five years or so are:

The first is a gradual flattening of the fare system. Longer trips are now a lower fare multiple of the shortest trips. Each recent trend has been in this direction. Examples include the abolition of both the cheapest fares (Rail+2, Short-Trip, National Bus section tickets) and the dearest fares (Zone 3, V/Line fare reductions). In 2006 only Seniors could get flat fare tickets (the Seniors Daily).

Since then new ticket types, starting with the Sunday Saver, school student periodicals and then the Weekend Saver, extended flat fares to new groups of passengers. Free travel at certain times has been extended, with the Early Bird and Sunday Pass being examples. While trips that involve zonal tickets still remain in the majority, zones are becoming irrelevant for an increasing amount of travel.

The second change is what is likely to happen with Myki ticketing. Nominally this involves no change to fares or zones. However people who select the 'Myki Money' option won't need to think about zones if they don't want to; instead they will just top up when their balance gets low. Fare zones become less of a 'barrier', which can happen with otherwise flexible tickets such as the 10 x 2 hour. Finkestein argues that users of roads with electronic toll collection are less mindful of the amount they pay than where toll collection was manual. There is no reason to suggest that passenger behaviour will be different with public transport smartcards.

To summarise, both flatter fares and less awareness of exact payment amounts will make fare zones less important in real life. Unless flat fares completely take over, distance (or its modern proxy of zones) will remain one of the main bases of calculating fares along with travel time, time of travel, and method of ticket purchase or payment.

While there is a great deal of appeal in buying in a Zone 1 suburb, it is desirable to know the real factors that attract people to the area. These are things like general amenity, facilities, walkability and quality of transport which do affect quality of life. While Zone 1 status doesn't hurt, the lower fare won't save much money compared to the likely higher price paid to buy into the area. Contrary to what the property agents and promoters claim, Zone 1 isn't worth paying much of a premium for if the area otherwise satisfies 'high amenity' or 'value for money' tests.

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2 Comments:

Blogger Daniel said...

I suppose when I was househunting for something in Zone 1, it wasn't just about the fares, it was also shorthand for not wanting to be too far from the City.

Certainly having been here for a few years now, I like it, but looking around at the prices just a bit further out, and pondering how little of my mortgage has been paid off, I'm inclined to agree with you -- the extra $650 per year or so for zone 2 isn't a huge amount compared to most mortgage payments.

As for fares changing, I guess it'll be stable for a few years while Myki gets bedded down, but there is the potential there for a change down the track (so to speak)

11:45 pm  
Blogger Peter Parker said...

Yep, I agree with the shorthand comment.

And in most cases (Bentleigh vs Moorabbin, Oakleigh vs Clayton, Heidelberg vs Rosanna, Sunshine vs St Albans or Coburg vs Fawkner the Zone 1 option is a more major (and more walkable) shopping strip.

The main cases where the Zone 2 station has more than the Zone 1 station closer in are Hoppers/ Werribee versus Laverton (though the distance is significant), Mt Waverley vs Holmesglen or Box Hill versus Mont Albert.

Interestingly in two of those three cases the housing stock is sometimes inferior ex commission homes.

12:01 am  

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