High speed rail vs. government debt

In Australia, high speed rail, reduced government spending and public finance arrangements for urban infrastructure projects remain a topic for debate.

Suppose that Sydney's trains could achieve the speed of China's bullet trains and move at 280 km/h. Newcastle is 162 km from Sydney, and the current travel time between the two cities is about 2 hours 40 minutes. At the speed of a bullet train the one way commute time would decline to 35 minutes. Common sense suggests that home prices in Newcastle would soar as businesses and households would come to view the city as a new Sydney suburb, and the demand to live and work there would sharply increase. Newcastle would benefit from the population increase and all the amenities that private enterprise would build to support it.

That’s exactly what happened in China as a consequence of the country's enormous investment in bullet trains. But the question is what level of public investment the Australian and other governments want to make to relieve congestion in big cities and spur growth in second and third tier cities, especially at a time when many are questioning the role of government and pushing for reduced government debt?

Here’s China's story: Between 2006 and 2010, the Chinese central government spent billions of dollars on new bullet trains that connect second and third tier cities with the mega cities of Beijing, Shanghai and Guangzhou - but of course bullet trains don’t connect every smaller city to a mega city. Comparing bullet train 'connected' cities to similar cities that the bullet train had bypassed, researchers documented large increases in home price for newly connected cities. Based on the ridership data for two major bullet train lines, they calculated that the average city house price growth per billion passenger-kilometres is 4.2%.

High rents in the big city also nudged the subset of households and firms with the lowest willingness to pay, to consider relocating to the secondary cities. But these decentralised households can still easily travel to the major cities for unique shopping and restaurant options.

The bullet train simultaneously alleviates some of the congestion costs associated with urban growth in the bigger cities, and triggers growth of the nearby second and third tier cities. This may cause nearby lower tier cities become a ‘safety valve’ for the mega city, alleviating concern about such cities growing too big. In China, such investments strengthen centre cities as the bullet train connects to downtown subway stations in the big cities. In this sense, this investment is a low carbon strategy that lessens the need for both in-city and cross-city car trips.

There’s even more to the story for companies. The bullet train has the potential to play a similar role as the Internet, attracting back-office activity and helping firms to fragment. This means they keep their deal makers in the expensive commercial real estate in the CBD, while sending their routine activities to cheaper land at the periphery.

The rapid transport will allow for a more efficient allocation of business activity across space, helping firms to control costs. It’s a win-win; the scarce big city’s land is efficiently used, and the secondary cities experience local growth.

In Australia, high speed trains seem unlikely to accelerate any time soon, so cities like Newcastle, Canberra or other cities on the North East Corridor will not enjoy the full benefits of their geographic proximity to Sydney, Melbourne or Brisbane. High speed projects cost billions, and the individual states would be expecting the federal government to provide much of this money. Critics will note that it is easy (and quite tempting) to spend 'other people's money'. In this current time of reduced government spending, public finance arrangements for urban infrastructure projects will remain an important topic for debate.

Ignite Your Thinking

What Do You Think?

Paul Melville · 1/11/2016 11:02:54 PM
The research on the impact of house prices in second-tier cities is interesting - it follows perceived logic, but very interesting to see it proven in a research study .

There is an obvious wealth effect here - if the government funded this investment there would be a transfer of wealth from taxpayers to house owners in these cities. The same thing occurs to a lesser extent every time a new highway or metro line is built.

Two ways of looking at this I guess... in some ways every homeowner should undertake due diligence and accept both the upside and downside risk that new government investments may place on their asset.

However home owners are quick to either block proposals when they will decrease house values (Auckland unitary plan) or ask for compensation. So if this approach is taken when house values fall, perhaps something simular could be looked at when house values go up.

Obvioulsy, blocking the proposal would not make sense here. But there could be a financing opportunity from the value increase in houses. Could the local councils of second teir cities take out loans based on the future value increase, and then recover this money from rates where houses have gone up in value? For example, having a special charge on house sales for the following 20 years, recovering part of the capital gain that can be attributed strongly to the investment (eg. if a mirror city without rail investment went up 15% over this time, and the city with high speed rail went up 45%, a portion of this difference could be taxed).

Marc Price · 28/03/2016 12:49:05 PM
The key piece of the puzzle missing here is "value capture". If High Speed Rail is to be viable or even profitable, it needs to not rely on ridership numbers alone to make it feasible. Instead it needs developers and other key private sector partners to fund its completion. Think of the money that could be raised by selling the rights for developers to build shopping malls and high rise next to the designated stations. The opportunity to create mini cities at the station with high rise living is not a far fetched notion. Cities like Hong Kong and others do this routinely when funding major projects like this. It is high time Australia got its act together.

@Tom, oh and New Zealand could do this too, although it might have to opt for waiting a decade or so, as the the only workable route with enough people would be a Wellington to Auckland alignment. And for this it would need to create massive value capturing along the route. Possibly creating a few cities along the way and maybe increasing immigration intake gradually to spur a development boom, given NZ has the combined population of the Sydney catchment area.

Tom · 27/01/2016 1:51:23 PM
Nice article Katharina, cannot wait until this innovative thinking finally trickles down NZ's way.

Rob · 30/05/2015 7:17:11 PM
But not even bullet trains are needed. 160km in 2hrs 40m is 60kph average. My semi-routine Newark to London journey is 130miles in 1hr30 giving 86mph average. Some cheaper options for higher speeds must be feasible than bullet trains?

Editor · 23/04/2015 2:39:31 PM
We apologise for this typo in Katharina's article. This has now been rectified to: 'At the speed of a bullet train the one way commute time would decline to 35 minutes'.

Katharina · 21/04/2015 9:04:45 PM
Thanks for spotting this, Daniel. It is 35 minutes in total.

Daniel · 14/04/2015 9:00:04 PM
35 minutes faster or 35 minutes in total?

Chris · 8/04/2015 2:43:58 PM
Japan had Shinkansen (bullet train) in 1964 travelling at 210km/h and we are still debating about it's benefits. I've been travelling from Newcastle to Sydney every week and I know how frustrating it is. It's time for our government to think Big.