Tuesday, August 08, 2006

How much is Zone One worth?

Real estate ads sometimes boast that properties are 'walking distance to Zone One station'. Even though houses as far out as Laverton (22km from CBD) qualify, the implication is that this is desirable due to short travel times, low commuting costs and (perhaps) better service levels.

Balanced against this is the higher property prices in Zone One. If anything the price disparity between inner and outer suburban properties has increased over the last 30 years, with the former generally exhibiting the highest capital growth.

The costs of yearly full fare tickets are as follows:

Zone 1 $1058 ($88 per month)
Zone 1+2 $1633 ($136 per month)
Zone 1+2+3 $1999 ($167 per month)
Zone 2 or 3 $709 ($59 per month)
Zone 2+3 $1434 ($120 per month)
Source: Metlink Fares & Travel Guide 2006

The difference between Zones 1 and 1+2 is just under $600 per person per annum. For most concession fare passengers it's a little over $300. The difference when moving from Zone 2 to Zone 3 is less, especially for concession passengers.

There are a couple of instances where fares are lower in the outer zones. The most important is for local travel, since Zone 2 or Zone 3 only tickets are cheaper than Zone 1 only travel. Fares are similarly reduced for school children living in Zone 2 or 3 rather than Zone 1.

However because public transport's modal share is highest for CBD and near CBD jobs, I will assume that people are commuting to work in Zone 1 and, as a result, will need to pay more if they live in Zones 2 or 3.

The next part of this exercise will try to convert fare differences into capital.

For a working couple the annual difference between Zone 1 and 2 will be $1200. $1200 extra will pay 8% interest on $15 000 of borrowed capital. If the couple have sufficient deposit this means that they can afford a home that's $18 750 dearer, assuming a conservative 80% loan to valuation ratio.

There are cases where houses in Zone 1 sell for less than what most people pay for a house in Zone 3. However this is generally confined to a handful of western suburbs. It is more common for homes in Zone 1 to be $100 000 to $200 000 dearer than homes in zones 2 or 3 and the published statistics reflect this.

This means that differences in transport fares across the zones are too small to offer little benefit to the inner-suburban home buyer because of high home prices. However this small difference also means that the public transport component of the extra transport costs involved in outer suburban living is small compared to the vastly lower house prices.

The only way that reducing transport costs can have a bigger impact are if households can reduce the number of cars owned and (especially) financed. This is more practical in Zone 1 suburbs which generally enjoy better public transport services and more closely spaced amenities within walking distance. Conversely if people moving to outer suburbs are forced to buy more cars and drive more then the increase in the 'private motoring' component of transport costs far outstrips the increase in the 'public transport fares' component.

Another way to make Zone 1 suburbs more financially attractive is to substitute unrealised future capital gains on real estate for higher mortgage payments being made today. Any number of property 'gurus' will tell you that suburbs within 10-15 kilometres of the CBD have superior capital growth histories than areas further out. A bit of guessing and fiddling can make the projected equity growth look impressive, but many would prefer extra money in the hand today!

For renters the fare difference works out to be $12 per week. This doesn't sound much, but I still maintain it is relatively more important for renters rather than buyers. This is for the following reasons:

One is that rental yields tend to be low in prime Zone 1 suburbs and highest in low socio-economic outer suburbs. Thus compared to home prices, there is less variation between rents across the metropolitan area.

Related to the above is that when property yields are lower than interest rates (as is the case currently) renting is far cheaper than buying. Also renters tend to have a lower income profile and a smaller average household size than owners. Hence a $1200 annual saving is more significant relative to both incomes and housing costs.

Another factor is housing diversity; the inner suburbs have low-rent studio and one bedroom apartments rare in outer areas. Many renters are willing to sacrifice space for convenience and low transport costs.

Considering all these factors, the situation is less clear for renters than home buyers. Especially for renters in smaller households, zones make a difference and influence location decisions. For buyers differences in fares are small compared to mortgage payments so they cannot be that significant except for those near zone edges.

Private transport costs, such as needing to buy, finance and run additional vehicles are likely to have a far greater impact on households. Car financing is a particular wealth hazard, especially given high interest rates, running costs and a depreciating asset. If this can be avoided by buying a more expensive but better located home then paying the difference could be worthwhile even for buyers (especially if buying a unit).

However once the high financial opportunity costs of additional cars are accepted (and there may be little choice in areas with limited public transport), then the marginal costs of driving aren't so bad, especially for families. Where useful services exist, the pricing of fares versus the marginal cost of driving is an important marketing point and a discussion for another day.

1 comment:

Josh said...

Transport tickets are not tax deductable. As such, to earn $1200 at 8%, double your $15,000 is required to cover tax; equivalent to something like a $35,000 more expensive home.

If you then start factoring travel times and people's value on time, the disparity between outlying and inner suburbs vanishes.

The best point to do an analysis would be near a boundary - say a zone 1+2 vs zone 2 boundary on a train-line, see how steep the property-price drop-off is. I'm willing to bet it will be around the $20K mark (one householder travelling into the city for work), but they'll be smoothing strategies like driving from zone 2 to the station that's in zone 1+2 to get the zone 1 ticket.