How to Get Rich Off Low Construction Costs

A country or region that is good at manufacturing cars can export them globally and earn hard cash. But what about public transportation? How can a city that has the ability to build good, low-cost public transport get rich off of it? There is an answer, but it is more complicated than “export this,” mirroring the fact that public transport itself is a more complex system to run than cars. This in turn relates to housing growth rates and urban economies of scale, making this the most useful in a large city with high housing production rates, of which the best example is Seoul. The good news is that the world’s largest and richest cities could gain tremendously if they had better public transport as well as high housing growth rates.

Infrastructure is not exportable

I wrote more than two years ago about the difference between dirty and clean infrastructure. Cars, car parts, and oil are exportable, so the majority of the cost of cars as a system are exportable, making dedicated regions like Bavaria, Texas, and the Gulf states rich. Green tech is not like that – the bulk of the cost is local labor. A large majority of the operating costs of a subway system are local wages and benefits; in New York, depreciation on rolling stock is less than 10% of overall operating costs. Construction costs are likewise almost entirely local labor and management, which is why they are determined by where the project takes place, rather than by which engineering firm builds the project.

The upshot is that Madrid and other low-cost cities can’t just get rich by building other cities’ infrastructure for them. They can’t build turnkey systems for New York and London at Spanish prices – the problems with New York and London come from local standards, management, and regulations, and while a Spanish engineering firm could give valuable advice on what high-cost cities need to change, it’s not going to reap more than a fraction of the construction cost saving in consulting fees.

Good transit as an amenity

What a city can do with low-cost construction is build a large subway network like Madrid, and use that as infrastructure to help local economic production. This works as both a consumption amenity and a production amenity. As a consumption amenity, it enables people to commute without needing to own a car, which reduces living costs and lets employers get away with paying less in nominal terms; this is a bigger influence on local firms, because international ones tend to use cost of living adjustments that make profligate lifestyle assumptions and factor in car costs even in cities where car ownership is low, like Singapore or New York.

As a production amenity, public transit also enables work concentration in city centers. This is separate from the observation that it allows workers to commute more cheaply – if a large city produces in a concentrated center, then without rapid transit, workers can’t get in at all. About 23% of people entering the Manhattan core on a weekday do so by car per the Hub Bound Report, but at the peak hour, 8-9 am, this falls to 9%, because the road capacity is capped around 55,000 cars an hour and a maximum number of parking spots for them. Auto-centric cities of New York’s approximate size exist, not by building massive road capacity to support comparable city centers, but by not having strong city centers to begin with. Los Angeles has maybe 400,000 people in the widest definition of its central business district, where in the same area New York has more than 2 million – and Los Angeles’s secondary centers, like Century City, top in the mid-5 figures before they get completely choked with traffic.

So what a city can do with cheap infrastructure is build a large subway network and support a large high-rise central business district and then use that to produce more efficiently. This is possible, but more complex than just exporting cars or oil, because to export cars one just needs to be good at making cars, and to export oil one just needs to have oil underground, whereas to produce out of public transit one also needs a solid economy in other sectors that can make use of the better infrastructure. I suspect that this is why Southern Europe keeps not growing economically despite building high-quality public transport – the Madrid Metro is great but there isn’t enough of a private economy to make use of it.

The connection with development

To maximize the use of a subway for its economy, a city needs to make sure development can follow it. This means that city center needs high job density, which includes high-rise office towers at the busiest intersections, and many mid-rise office buildings in a radius of a few kilometers. Neither the typical European pattern in which there are few skyscrapers nor the American pattern in which there are skyscrapers for a few blocks and then the rest of the city is subject to strict residential zoning is ideal for this. It’s better to have a city whose central few square kilometers look like Midtown and whose surrounding few tens of square kilometers look like Paris, with the occasional secondary cluster of skyscrapers at high-demand nodes; let’s call this city “Tokyo.”

Residential development has to keep up as well. A city region that has a strong private economy but doesn’t build enough housing for it will end up with capped production. Normally it’s the lowest-end jobs that get exported. However, two problems make it more than a marginal reduction in production. First, expensive cities have political pressure to allocate apartments by non-market processes like rent control, keeping less productive but politically favored people; a large gap between market rent and construction costs creates plenty of surplus to extract, and a mass exodus of firms from cities like San Francisco in such a situation starts from thee least profitable ones, and by the time it affects the most profitable on, the system is entrenched. And second, breaking a firm’s chain between high-end headquarters jobs in a rich city center and lower-end subsidiary jobs elsewhere reduces firmwide productivity, since many connections have to be remote; Google has problems with all-remote teams and tries to center teams in the Bay Area when it gets too unwieldy.

For one example of a city that does everything right, look at Seoul. It has low construction costs, around $150 million per kilometer for urban subways. Thanks to its low costs and huge size, it keeps building up its system even though it already has one of the largest systems in the world, probably third in ridership after Tokyo and Osaka when one includes all commuter lines. It also has high density, high-rise CBDs, and fast housing construction; in 2019 the Seoul region built around 10 units per 1,000 people, representing a decline since the mid-2010s, and the state has plans to accelerate construction, especially in the city, to curb rising prices. This is till a better situation than the weak economy and flagging construction in much of Europe, or the NIMBY growth rates of both much of the rest of Europe and the richest American cities.

55 comments

  1. Benjamin Turon

    Interesting post. Yet who are the “less productive but politically favored people” in cities like London, New York, or San Francisco? Low-wage workers? Senior citizens? Children? Recent immigrants? Long impoverished and oppressed minorities?

    • Alon Levy

      Homeowners on Prop 13, plus aging hippies. It’s not the long impoverished and oppressed minorities, since SF is losing black people, nor recent immigrants, who are living in horrifically overcrowded conditions to take advantage of SF incomes.

      (London is different, yes – no rent control, and I think also somewhat higher housing production. Then again, the government in Britain seems intent on setting London’s economy on fire, which is the surest way to reduce rents.)

  2. Benjamin Turon

    When most of these aging hippies (sitting on the dock of the bay, watching the tide roll away) and retired homeowners (another pleasant valley Sunday, charcoal burning everywhere) pass away, I wonder if that will change things in California, particularly in the Bay Area concerning political support for increase housing. It does seem that more policy makers are already pushing to address this issue of transit and housing in and out of California, so perhaps change is already underway.

    • Alon Levy

      Prop 13 rates can be inherited, so the aging hippies’ children can keep squatting on valuable land and tell themselves that they’re oppressed because in the 1960s long hair for men and unshaven faces were not accepted in professional circles.

    • Henry Miller

      I’m not sure. The problem is once you get in you have incentive to keep the system. If you rent things are bad as rent keeps going up. Once you have finally managed to get into a house, your payments stay the same, even as home values go up. Thus the lack of construction helps you as no matter how bad you treat your house it will go up over time so when you want to get out you have plenty of equity – or more likely you cash out refinance and have more cash for fun now at the expense of never paying the house off. Either way as a homeowner more building will collapse your property value and then that play comes to an end. (you still get some of it from inflation)

      The only time it hurts home owners is when the kids are ready to move out. Most people don’t like to hurt their kids that way, but they probably don’t understand the cause.

      • RossB

        “Either way as a homeowner more building will collapse your property value”

        Not necessarily. The value is in both the land and the house. The value of the house may go down, but the value of the land should go up (you can do more with it). This is basically the idea with density — land prices are high, but housing prices are low. Eventually you could see prices going down as people just looking for a place to live find alternatives, but there are plenty of people who would prefer living in a house with a yard. As lots of houses get converted, existing houses become more scarce, and thus more valuable (especially since the nicer looking houses are more likely to remain). I think the overall market has a bigger influence. It is like a mansion — if there are lots of wealthy people, than one of those rich people will buy it. Otherwise, it gets converted to apartments, or town down to put up one.

        As far as Prop 13 goes, though, it is a different story. There is definite financial self interest in keeping that system.

      • Jason

        From my experience in Asia, property value goes up when higher density is allowed, because the land is more valuable as more units can be built on it. I’m not sure why Americans don’t understand this.

  3. Gok (@Gok)

    > support a large high-rise central business district and then use that to produce more efficiently

    There are not that many industries that are actually more efficient in high rises than sprawl. The primary and secondary economic sectors are of course right out. Within the services sector, there are limits. You’re only going to be able to lower wages at already low pay levels. The working class will accept a pay cut to avoid car ownership, the upper middle class won’t.

    • Nilo

      ~70% of the US economy is services so your concerns seem pretty limited. And the vast majority of service industries benefit from greater density, everything from office work to restaurants.

      And I think Alon’s talking from a global perspective here, as in the middle class in much of the developing world and competing internationally. That’s not really relevant in the US, where labor costs in a internationally comparative sense are sky high.

    • Alon Levy

      Office workers routinely do not own cars in New York. The top-1%er bosses have cars, but the mass of non-1%er office workers often don’t, or if they do it’s 1 car for a family.

        • RossB

          No, they are doing so to attract workers from a wide region. These workers would not tolerate a driving commute of this nature, but are fine with taking the train (or bus). Transit scales, driving doesn’t.

    • Herbert

      Siemens is currently in the process of building two new “showcase” locations. One in Erlangen, their postwar home (on Google earth, go west from the S-Bahn stop “Paul Gossen Straße”) and one in Berlin, their foundational home. Neither of them is particularly high rise. In Erlangen they’re instead building a midrise “campus” with walking paths in between…

  4. Tonami Playman

    What can cities with cheaply constructed transit infrastructure, but low production like Madrid do to maximize utilization? Adopt English as a business language to attract more global businesses? It seems Seoul is doing just fine with Korean.

    Another issue I see with high construction costs is deferring inevitable social costs. Take Texas for example and their refusal to winterize their natural gas pipelines and electricity infrastructure is now dealing with economic damage that might be more expensive than if the extra funds needed were put in place to winterize their infrastructure against a frozen disaster.

    Then there’s Houston at the city level which is received $15.3 billion federal funding to recover from the damage by 2017’s Hurricane Harvey and was asking for $61 billion. A Tokyo style G-Cans flood tunnel might have mitigated the damage. It cost Tokyo $2.6 billion to build at completion in 2006, which is roughly $3.4 billion in 2021 dollars or 3.8% of the federal burden. But with high US construction costs, such a system could come priced at $17 billion which will scare the city Government from even attempting it. Yet in a decade, another Harvey level destruction is guaranteed to happen with the accompanied social cost.

    • Luke

      I think the answer to the last question is pretty obvious. Decades of “government bad” and “taxes bad” mentality in the U.S. has completely ruined the social consensus on how to prepare for the future; more than that, it’s destroyed the idea that preparing for the future–however it’s envisioned–is undesirable because it represents spent opportunity cost (though it’s rarely phrased as such). The alternative to doing something now to prepare for the future isn’t to do nothing now and assume that nothing will happen, despite the fact that much of American civil society and the wealthy seem to think that’s an actually-occuring analogue. Flying by the seat of your pants doesn’t work for a state of 30 million people, much less a country of over 300 million. We have to start “sacrificing” that opportunity cost now by investing in state capacity to handle these types of events–whether it’s freak snow storms, climate change generally, or urban planning–lest we lose our opportunities before they even come.

      To the crux of this original post, I have to say that Seoul’s situation is a magnitude better than any American city, but they still do have a fair amount of homelessness, low-quality housing, and traffic to contend with, and housing asset inequality is a very real thing, especially between older and younger generations, the latter of whom could count on higher inflation to pay off their housing debts and turn them into assets, the younger of whom are entering a relatively slowly-growing job market with a paucity of secure, high-paying jobs. I’m not sure how this affects your thesis of how Seoul (or Tokyo) can profit off their well-planned cities, other than spreading the correct gospel of “build lots of well-connected housing and transit”.

        • Herbert

          During the housing bubble in Spain, some people reportedly quit college to work in construction because it paid better. Tourism and construction still suck up a lot of Spain’s youth in terms of employment and birth rates aren’t exactly sky high.

          And when there’s a crisis in either or both, it’s not exactly easy to retrain people…

          • Luke

            Korea’s in a similar situation. There’s a very clear two-tier job market where anything non-chaebol overworks and underpays because the chaebol or chaebol-linked companies are the only globally-competitive employment providers, and Korea’s work culture is leading it to have what is almost certainly the world’s lowest fertility rate.

            I do think that all of this is outside the discussion of urban planning, but one imagines there must be a twisty road from here to there.

  5. Roger “Four Freedoms” Senserrich (@Egocrata)

    Madrid is actually fairly wealthy and growing wealthier at a really, really fast clip. Sure, the economy crashed dramatically after the bubble, but GDP per capita has pretty much doubled in the past 20 years. This is much faster than the rest of Spain (that grew by about 65% from 2000 to 2019) and the much-less-productive-in-subway construction Barcelona.

    Sure, it is not, say, Korea. But it is the fastest growing metro area in the EU, if I am not mistaken. The average madrileño is not yey as wealthy as the average German, but they have closed the gap a lot.

    • Alon Levy

      Is Madrid still growing? Because immigration rates to Spain crashed in the recession, and IIRC in 2013 they turned negative.

      • Luke

        I think it’s worth noting that Seoul’s actually been shrinking for the past several years, albeit very slowly. The population is gradually bleeding out to the surrounding Gyeonggi province; whether or not they’re (Alon) counting Gyeonggi-do as “Seoul” (the greater metro being known as Sudogwon), I’m not sure. However, a lot of the new housing around the capital that people are being drawn to is, in fact, along transit lines. The city of Siheung, in particular, springs to mind. A commuter-ish line called the Seohae Line–which will eventually go quite a bit further north and south of its current length and function as a true intercity–and a westward spur of a the under-construction Shinansan Line are generating a lot of development around where those two lines will intersect.

    • Mikel

      Madrid is actually fairly wealthy and growing wealthier at a really, really fast clip. Sure, the economy crashed dramatically after the bubble, but GDP per capita has pretty much doubled in the past 20 years. This is much faster than the rest of Spain

      Yep, Roger is right. There’s a latent territorial conflict in Spain that has been masked by the Catalan issue over the 2010s — the feeling in the periphery that Madrid is sucking all the air in the room by attracting businesses and young, educated people with them. Anecdotally, I know a physicist, a biologist, several programmers, an actor, a screenwriter — they all move to Madrid because that’s where the jobs are. And that’s from a Basque perspective, a pretty wealthy, if stagnating, region; I imagine the drain from poorer places like Asturias or Galicia is worse. The cost of housing and gentrification in the most transit-accessible areas are already becoming a big problem, and Madrid doesn’t have Barcelona’s land scarcity excuse. And the underutilization of the Metro is partly due to an otherwise car-centric transportation and housing policy and a concrete-before-anything attitude.

      Also, @Herbert, the figure in your source appears to be the Autonomous Community population. Nowadays Madrid’s orbit spans much of the Community and stretches into neighboring provinces: a mixture of working-class suburbs along Cercanías lines all the way to e.g. Guadalajara and Parla; HSR commuters in Toledo and Segovia; and the rowhouse/SFR exurbs next to major highways like M-50 and A-42.

      • michaelrjames

        @Mikel

        It has always been thus with Castile. And why Catalonia and Basque have separatist movements. Paradoxically, though entirely logically, it is why they were more entrepreneurial and first (by a few centuries) to embrace industrialisation. Castile either steals gold and silver from South Americans or steals from its subservient provinces to centralise as much power and wealth in Madrid.

  6. Herbert

    Have you heard of the recent brouhaha about Anton Hofreiter (possible Minister of transportation in a government including the greens) saying single family homes are inefficient?

    Nobody in that debate is quite “Kowloon Walled City in my backyard” but it seems to reveal that not only living in single family homes seems to align politically but also building them…

      • Herbert

        They’ll certainly want it for the greens. Environment, Transportation and Foreign Affairs are the ministries the Greens are most likely after. But of course we will know only after a government is actually formed. Plus, Hofreiter is not the only Green candidate for minster of Transport – there’s also Cem Özdemir or Robert Habeck as potential candidates for the office….

  7. Eric2

    “high-rise office towers at the busiest intersections, and many mid-rise office buildings in a radius of a few kilometers”

    This is appropriate for cities of a certain size. But cities come in many different sizes – 0.5M, 5M, 25M. Each size supports a different level of density, yet you make one recommendation for all of them.

    • Alon Levy

      That recommendation holds down to the size class of Stockholm or Zurich, just with the horizontal areas scaled down. Stockholm would work better if it had more high-rises around Sergels Torg rather than in Kista. (Granted, the city center high-rises it does have are a quintuplet of eyesores. Swedish urban renewal is fugly.)

      • Joseph

        For reference, Zurich metro population is a little over 1.6 milion, and Stockholm metro is about 2.3 million.

        In general Alon’s recommendations about cities seem to be focused on metros with over 1 million people, which fits a certain definition of “city” as “metropolis.” While I agree that small cities with 100,000 to 900,000 people are also cities (if they are not a suburb of a nearby metro), they do have different needs.

        A city of 500k people might need to start planning for an initial subway line, while it can be still built cheaply, if it is projected to grow to over 1M population in the next 20 to 40 years, but a small city of 100k should be focusing on a bus network and affordable surface rail if there is existing right-of-way, and keep development reasonably compact so that walking and biking across the city is still feasible.

        • Herbert

          Erlangen is a city of 100k next to a city of 500k (Nuremberg). Nuremberg has both Trams and a subway. What should Erlangen do wrt public transit?

          • Lee Ratner

            Buses in the city and special buses to the nearest Nuremberg tram and subway stops.

          • Herbert

            So you think http://www.stadtumlandbahn.de is a bad idea?

            Because the bus line(s) you envision already exist: Lines 20 and 290 (serving “am Wegfeld”, the northernmost tram stop in Nuremberg) and Line 30 (serving “am Wegfeld” and the U2 stop “airport” with obvious side benefits)

        • Lee Ratner

          I think density also matters. Not as much as the American right thinks but there are lot of cities, meaning the entire area is under one municipal government, with populations of over 500K or more people but dispersed over a very wide area. They might have enough density for a light rail system but not enough for a metro,

          • Herbert

            There are very few cities with below 600 k inhabitants that have a metro. Of the top of my mind, I can think of Rennes, Nuremberg and Lausanne. It’s possible I am forgetting some, but in all of them there are those who say the metro was either a bad idea or works only because of unique local circumstances…

    • Jason

      Given that americans seem to think anything more than 5 floors is high rise the recommendation is appropriate. Towns of 0.5M should have 10+ floor buildings in downtown.

  8. Lee Ratner

    Japan seems to have beat the NIMBY tendency in politics in a way that other democracies did not. A lot of NIMBYism in liberal areas of America is a very tough to crack baptist and bootlegger coalition of wealthy white liberals and activist minorities.

    • Andrew in Ezo

      There is NIMBYism in Japan, but it tends to manifest itself in issues relating to the environment and safety- location of power plants (esp. nuclear), waste disposal sites, airports, military bases, etc. Recently there was a case of opposition to the building of a social services center in a residential neighborhood, but these are rare. High density housing and development in general are not hot button issues, and new rail lines are seen as desirable in the neighborhoods that will be served by them. Notably, there was opposition to the Tohoku Shinkansen extension from Omiya south into Tokyo back in the late 70s and early 80s, but was placated by building the parallel Saikyo commuter line, as well as capping the speeds of shinkansen trains to reduce noise.

        • Tonami Playman

          That was the Narita Shinkansen. It was a similar situation to the Tohoku Shinkansen. It was going to bypass all of Chiba and Narita without serving them just to get from Tokyo station to Narita airport. The fact that the line was linked to the hotly contested Narita airport did not help either. However today the Tokyo portion of the line is now used by the Keiyo and Musashino lines while the Narita portion is now used by the Keisei Narita Airport line.

          • バニートルーパー (@archie4oz)

            Narita Airport itself is probably the biggest living symbol of NIMBY’ism, but that’s an extreme example and not the norm. In fact, the fiasco of the riots were probably big lessons for the National and Prefectural Governments take more creative way to alleviate gripes with construction.

      • Ryland L

        My guess is that existing rail ridership and land use density are high enough Japan, that neither new rail nor new development is seen as a significant deviation from the norm

  9. Basil Marte

    “expensive cities have political pressure to allocate apartments by non-market processes like rent control, keeping less productive but politically favored people”
    Not merely non-market, but opaque processes. If people are awarded goodies for legible reasons, then anyone meeting the criteria can expect the reward. If you want to safely restrict goodies to insiders, you want to be confusing.

    Large American (including Canadian) cities, with a high-rise CBD surrounded by a wasteland of SFDR housing remind me of the Lonely City trope (https://acoup.blog/2019/07/12/collections-the-lonely-city-part-i-the-ideal-city/).

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