Does Infrastructure Pave the Way for Higher Property Demand?
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DEPARTMENT OF ECONOMICS Uppsala University Bachelor thesis (C level) Author: Isak Myrestam Supervisor: Mattias Öhman Spring Term 2020 Does infrastructure pave the way for higher property demand? A difference-in-differences analysis of the effect of the Bothnia Line on real estate prices in Västerbotten Abstract This study explores the concept of improved train infrastructure in Sweden and how it affects the attractiveness of cities. The research uses a difference-in-differences model to determine whether the construction of the Bothnia Line in northern Sweden has had an impact on real estate prices in the municipalities Nordmaling and Robertsfors between 2008-2016. By employing the hedonic price model, the study finds evidence that house-specific factors such total house size in square meters, location near water and size of backyard all play a role in determining the final purchase price of houses in the two municipalities. However, the findings of this study do not indicate that the launch or the subsequent investments on the Bothnia Line has had any measurable impact on the real estate prices in the region. This is in line with previous research on the project. Keywords: Train infrastructure. Commuting. Real estate prices. Hedonic price model. 2 Table of contents 1. Introduction ......................................................................................................................4 2. Background: The Bothnia Line ........................................................................................7 3. Theoretical framework ................................................................................................... 10 3.1. Investments and expectations ..................................................................................... 10 3.2. Previous studies: Commuting and regional growth ..................................................... 10 3.3. Previous studies: The hedonic price model ................................................................. 12 4. Methodology ................................................................................................................... 14 4.1. Data and variables ...................................................................................................... 14 4.2. Descriptive statistics .................................................................................................. 18 4.3. Empirical Strategy ..................................................................................................... 20 4.4. Model specifications: Difference-in-differences ......................................................... 24 5. Results ............................................................................................................................. 28 5.1. Effects on house prices with a pre- and post-treatment variable .................................. 28 5.2. Effects on house prices with yearly interaction terms ................................................. 32 5.3. Effects on house prices at inner-city and non-central locations ................................... 33 6. Discussion ........................................................................................................................ 35 7. Conclusion ....................................................................................................................... 39 References ........................................................................................................................... 40 Appendix ............................................................................................................................. 44 3 1. Introduction In light of the Paris agreement, Sweden faces many challenges in readjusting society to meet the goals of zero carbon emission by 2045 (Miljödepartementet 2017). Infrastructure in general, and fossil-fuel-free modes of transportation in particular, are seen by many as the backbone of such a transition. As a result, there has been significant debate in recent years whether Sweden should invest in high-speed railways. Current plans suggest connecting Stockholm with Malmö and Gothenburg respectively, which the Swedish National Audit Office1 (Riksrevisionen) published a report about as recently as in November last year (Riksrevisionen 2019). When weighing the pros and cons of expanding the Swedish train network, a noteworthy aspect of this discussion is the effect on communities along the way. Specifically, whether it could increase daily commuting from smaller cities in the vicinity of new stops or improve the attractiveness of previously inaccessible areas. This study will provide commentary on the effects of improving Swedish infrastructure by examining whether one specific project, namely the Bothnia Line in Västerbotten, has had an impact on the regional property demand. The Bothnia Line (in Swedish Botniabanan) is a railway situated along the coast of northern Sweden that began operating in 2010. It connects Umeå in Västerbotten with a band of coastal cities (Hörnefors, Nordmaling, Husum, Örnsköldsvik, and Nyland) down to Kramfors municipality for a total of 190 km (Larsson 2013). However, the construction and planning process of the railway was subject to several complications and delays. The increased cost of the total investment has weighed heavily to the negative side in previous reports (Riksrevisionen 2011). Considering that the railway did not operate on full capacity until more than a year later, in 2012, these reports are now reasonably outdated. As previously stated, the purpose of the thesis is to expand upon the literature on the effect of improved train infrastructure on the attractiveness of local communities. While several studies have evaluated the Bothnia Line from a cost-efficiency; commuting behaviour; or expectations perspective (Brandt 2005; Riksrevisionen 2011; Larsson 2013; Uneklint 2016), a comparative study on the real estate prices in Västerbotten before and after the completion of the railway signifies an unexplored research area. This study aims to make unique contributions to the 1 All translations relating to governance in the text body, including myndigheter (government agencies), län (county) and kommun (municipality) are based on the Swedish Parliament Official Wordlist (Sveriges Riksdag 2015). References will still use the Swedish name to more accurately reflect the source (such as “Riksrevisionen 2019”). 4 research by investigating if the railway has increased the attractiveness (proxied by prices in the housing market) of cities along the track. With this explicit purpose in mind, the study will aim to answer the following research question: Has improved accessibility through the Bothnia Line led to a significant increase in house prices in Nordmaling, compared to Robertsfors, between 2008-2016? Previous studies have reported high costs and low capacity as some of the struggles that the Bothnia Line faced during its launch (Riksrevisionen 2011). An investigation into the impact on real estate prices before the completion of the railway showed no effects on the market at the time (Brandt 2005). However, several empirical reports have found a positive correlation between proximity to train stops and rising housing prices in other regions of Sweden. Many of these studies use hedonic price models, which theorise that house prices are a sum of implicitly priced characteristics. These can, in turn, be estimated through different econometrical methods (Rosen 1974; Bohman and Nilsson 2016). A prominent example of this is a difference-in- differences study that investigated the introduction of a new railway close to Landskrona in 2000 (Jonsson 2007). Through the looking glass of these previous studies, the thesis establishes three probable hypotheses: Hypothesis A: The Bothnia Line has had no measurable impact on real estate prices, because of many delays and adaptive expectations. Hypothesis B: The Bothnia Line has had a positive impact on cities south of Umeå after the renovation of neighbouring train lines, compared with similar cities north of Umeå. Hypothesis C: The Bothnia Line has had a positive impact on house prices for property closest to the railway but has not influenced the whole municipality. To explore the concept of regional attractiveness, the study will perform a difference-in- differences study of the real estate prices before and after the launch of the new railway. The subjects of the study are Nordmaling and Robertsfors municipality. They are both located in Västerbotten but only Nordmaling, located south of Umeå, was affected by the launch of the railway. Real estate prices are then examined through the hedonic price model. In order to examine both the effect of the launch of the railway, as well as the effect of improvements on neighbouring lines, two variations of the method are constructed that defines post-treatment period as 2010 or 2012 respectively. These choices are accompanied by a discussion on three 5 necessary requirements for using the difference-in-differences model: Stable unit value assumption, exogeneity and parallel trend assumption. Several different regression models are constructed in order to test the hypotheses. In line with previous studies, the results of the regressions confirm that several factors such as the size of floor space, location and size of the backyard all play a role in determining the final purchase price of houses in Västerbotten. The study finds inconclusive evidence on whether the launch of the Bothnia