Pricing can be a very effective tool for allocating scarce resources.
In an earlier article I discussed Tokyo’s remarkable return to housing affordability in recent decades. I speculated that a cultural tolerance to the ‘messiness’ of intensification could be a factor in Tokyo’s switch to affordable housing following the property boom of the 1980s.
Internationally, it is unusual for a city to change its long-term pattern of affordability. Generally the experience has been for unaffordable city to remain unaffordable -perhaps due to the difficulty in achieving a societal consensus and therefore the political will to implement significant housing reforms (this seems to be the case for New Zealand in the last thirty years).
Given that Tokyo is the exception which might prove the rule, it is worthwhile looking at what other urban economic aspects the city is exceptional in. The first and most obvious one is its size, the metropolitan area of Tokyo-Yokohama is the world’s largest urban area containing 38 million people. Interestingly, despite Japan’s declining population, Tokyo itself is still growing. Tokyo at a systemic level must have efficient mechanisms to allow it to function and grow to such a large size.
Secondly, the issue which this article focuses on is how a network of transport arteries, veins and capillaries in Tokyo are allocated by competitive forces. There are two main elements to this -carparking is not subsidised and neither is public transport. It is possible that this creates a positive systemic effect -where the competitive transport mechanisms combine with competitive urban housing intensification characteristics to make Tokyo a relatively affordable city. Which as I have said is amazing given Tokyo’s size.
The Economist recently wrote an article -Parkageddon -discussing that perhaps more powerfully than anything else, parking influences the way cities look, and how people travel around cities.
Many cities mandate that residential and commercial dwellings must provide a certain proportion of car parking places. These parking minimums can boost supply far beyond what the market demands. When London abolished minimum parking requirements in 2004, research showed that the amount of parking in new residential blocks promptly plunged, from an average of 1.1 spaces per flat to 0.6 spaces.
Usually car parking minimums are justified on the grounds that free car parking is a good thing. Unfortunately, when something is free there is a tendency to overuse it -like we would if water, electricity… was free. This is especially problematic as space in growing urban areas is an increasingly limited resource and of all the transport options -the private vehicle is the one that consumes the most space. The Economist explains that minimum car parking requirements are in fact a hidden subsidy for some and cost for others.
Free parking is not, of course, really free. The costs of building the car parks, as well as cleaning, lighting, repairing and securing them, are passed on to the people who use the buildings to which they are attached. Restaurant meals and cinema tickets are more pricey; flats are more expensive; office workers are presumably paid less. Everybody pays, whether or not they drive. And that has an unfortunate distributional effect, because young people drive a little less than the middle-aged and the poor drive less than the rich.
Another Economist article -Aparkalypse now -reported that research shows that parking adds 67% to the cost of building a shopping centre in Los Angeles and a study of Washington, DC, found that the availability of free parking is associated with a 97% chance somebody will drive to work alone.
Japan has not subsidised car parking in this way. In Tokyo car parking must respond to market forces.
In Tokyo cars do not park on residential streets and all car owners must show a receipt for a private car park when they register their cars. There is no assumption that cars can freely park on the street -in fact it is a foreign concept. Car parking is the owner’s responsibility to make suitable arrangements. In Tokyo, how much, if any parking is provided by new residential or commercial premises is a commercial decision. The pricing of car parks varies, for instance, parking close to train station might be say $150 a month, versus a 10 minute walk further away, where the price might be less than $100. The price varying because of competition from commuters for space close to the train station.
In the future driverless cars will make car parking redundant as residents will order a driverless car to drop them off and pick them up -so drop-off zones are all that will be needed. This will necessitate congestion road pricing to prevent excessive congestion from large numbers of zero occupancy driverless cars circling urban areas 24/7 looking for passengers. Driverless car companies will want to acquire a network of private car parks to store their cars between rides to avoid these charges. The number of car parks and their locations will be commercial decisions based around factors such as, congestion charges and other operating costs, the cost of car parking, estimated search times etc.
In the future electric vehicles will also become more efficient and be more frequently used. Fuel tax revenue from conventional combustion engine vehicles will fall and new revenue sources will be needed to fund road maintenance. This could be another factor in moving to congestion road pricing.
Given the size and flexibility of Tokyo it would not be surprising if the city was an early adopter of driverless cars, electric cars and road user charging systems.
Tokyo has the world’s most concentrated collection of competitive and profitable private commuter rail companies. Japan has always had a significant minority of private railways and in 1987 with the privatisation of Japan Railways a majority of the system is now in private hands. Today there are 16 major private railways in Japan, most of them competing against the Japan Railways Group which includes 6 passenger operating companies, separated by region. The most successful, profitable and competitive part of the private railway industry is centred around Tokyo. Tokyo demonstrates that in a healthy, growing city -private railways can be successful.
I believe it is not just that Tokyo is growing in population that makes private railways a success. It is because commuter rail’s chief rival -the private motor vehicle is not excessively subsidised, which allows trains to successfully compete. In particular, not subsidising car parking means that private vehicles in Tokyo never receive hidden subsidies like they frequently do in western cities.
Is there a theory which links up competitive transport and urban land markets?
I believe that transport economist David Lupton articulated one in 2016 (see link at bottom). It being a systemic approach that conceptually links the commercial allocation of land for housing and business with the commercial allocation of road space for transport users. This systemic approach has many advantages -it provides a level playing field between public transport and private vehicle use and it achieves this in a way that does not restrict affordable housing options.
David believes our problems arise from our collective responses to the challenges of growing cities. His urban development theory goes like this. Towns have a natural centre -a video here explains why. As a town grows into a city, the central business district becomes larger. Traffic increases, delays and congestion start occurring -as the road network is fixed in size, yet the number of travelers crossing the city and accessing the central business district increases. At this stage of city development secondary centres start to make commercial sense and the city becomes polycentric.
Also at this stage of development cities are pressured into investing in transport distribution networks to better access the growing central district and other polycentric centres. Many cities respond by inserting expensive motorway systems into existing neighbourhoods to relieve congestion and speed up travelling times.
In New Zealand, historically city motorways, like roads, have been free to use. Which means private motor vehicle road users have receive subsidised travel. This has several effects -because it is free to use -these sort of motorways encourage residents to commute from further and further away. Also because roads and motorways have been free to use -other transport options are not utilised and possibly fall into disuse rather than being modernised -such as New Zealand’s once extensive tram networks -which fell out of use in the 1950s.
The unfortunate long term effect of this car centric system of urban development/transport provision is that governance institutions face exponentially rising build costs to construct the more and wider motorways to cater for the increasing number of private vehicles trying to access a fixed amount of street space, within the existing city footprint.
The ever rising expense of inserting motorways into cities can lead to a later secondary response -subsidies for more space efficient travel options -walkways, cycleways, buses, light rail and commuter rail rapid transit systems to relieve congestion on roads and motorways. Auckland public transport advocates are now on to a Congestion Free Network 2.0.
All of this infrastructure and subsidies are expensive, so restrictions are often placed on the outward expansion of cities to minimise demand for additional infrastructure.
Unfortunately growing cities that have restrictions on their expansion result in pressure cooker urban land prices which creates unaffordable housing.
In New Zealand there has been sharp divisions between groups of advocates who present different city visions to the public.
One group advocates for private vehicle subsidies in the form of more city motorways and minimum car parking requirements for residential and commercial dwellings. This creates the problem of excessive sprawl and street configurations -such as cul-de-sacs that are car friendly but discourages alternative transport options -walking, cycling and public transport. All these factors combine with a growing city to create congestion of the road network. Often this group of advocates argue for removing restrictions on the outward (but not upward) expansion of cities for affordable housing reasons and perhaps as an implicit or explicit acknowledgement that space within the existing city footprint is tapped out from the car only urban development model.
Another group believe the answer to transport congestion is to subsidise more space efficient transport options, such as rapid transit. Further, they have a vision that cities should be compact, pedestrian, cycle and public transport friendly -to be achieved by planning dictate -not by using pricing signals. This group are often strong advocates for housing intensification but argue that transport (and other) infrastructure for outward expansion cannot be afforded, so planning restrictions are needed. Restricting the outward expansion of cities limits land supply -creating a pressure cooker effect on the limited number of buildable land plots -which adds upward pressure to house prices.
Historically, in New Zealand these divisions have been a kind of Cold War that nobody could win -neither side had a definitive answer. Recently, there has been some movement in positions and the possibility that a consensus on housing affordability and transport/infrastructure provision will form. A big driver is the moral unacceptability of the housing crisis -of families living in cars and garages in particular.
What David Lupton proposes is congestion road user charges to address the root cause of the growing city problem. Modern technology -such as used by Uber -could in real time measure congestion and vehicle movements, so that users could be accurately charged whenever congestion occurs (there could be charges for other things too -road damage based on axle weight, pollution, CO2 emissions etc).
Road pricing means congestion is prevented from forming, if demand for travel to a particular place increases -the road price increases. Initially this tends to shift demand elsewhere -other times etc. But if demand and congestion does increase and therefore road user prices rise, this would induce private transport investors to create alternative space saving travel options -a rapid transit system for instance -like Tokyo’s private rail operators do. Rising car parking charges would have a similar effect.
Because the cost of infrastructure is met by the users, restrictions on city expansion can be removed. Private property for urban development can be competitively priced without rationing. If the restrictions on intensification are also removed -such as minimum car parking requirements -then like Tokyo a good proportion of urban development could be intensification within existing city neighbourhoods.
In effect what David is advocating for is to correctly price the publicly owned road spaces and urban private property spaces to solve problems like congestion, rising infrastructure costs and unaffordable housing. Given this has many parallels with how Tokyo successfully manages its city development then David’s urban development theory has some practical real world support.
Further reading on mechanisms that might account for Tokyo being the world’s largest urban area.
Other mechanisms that might account for Tokyo’s success
There are almost certainly other mechanisms that keep Tokyo’s land and housing affordable for the average Tokyoite and…
Other relevant articles on the economics of housing or private railways
David Lupton says we need appropriate charges for infrastructure and services so the choices people…
By David Lupton * Cities are the future. Worldwide the proportion of people living in cities is increasing rapidly. New…
The Unassuming Economist
Joseph Gyourko is the Martin Bucksbaum Professor of Real Estate, Finance and Business Economics, & Public Policy at The…
Why Tokyo’s Privately Owned Rail Systems Work So Well
There are megacities, and then there’s Tokyo. With a metro-wide population of 35 million, it’s the undisputed king of…
City lessons from private rail operators of Japan — Gehl
We could broaden the typically singular approach to public transport delivery with other sources of revenue that can be…