The road to higher prices?

How do residential property prices respond to new highway connections? We explore the impact of reduced travelling time on house prices in four different cities along the southern coast of Norway. The four towns are located as nodes on a chain, where the town of Kristiansand is located in one end of the chain-of-towns. In 2009, a new highway was opened between Kristiansand and three other towns east of Kristiansand. The three towns are located in increasing distance from Kristiansand. The new road substantially reduced the travelling time between the four towns. We use hedonic price functions estimated on the basis of sales data for dwellings in the period before and after the opening of the new highway and examine the impact of the new road on house prices. The fact that the four towns are located as nodes on a chain along the coast, with sparsely populated rural areas inland and between the towns, makes our case particularly suitable for studying the impact of a new road.We hypothesize that the new road reduced housing prices in Kristiansand, which is the largest of the four towns, and increased housing prices in the other three towns. We find that the house prices in Kristiansand increased only 14 per cent over a four-year period, while the increase was about 25 per cent for the other towns. We examine the robustness of our results by considering alternative explanations for the house price changes. We also examine the robustness of our findings by considering the development of house prices in a different town located west of Kristiansand and not directly affected of the new highway. We conclude that a the new and improved highway lead to a substantially stronger price increase in the smaller towns benefitting from better road connection to the larger town Kristiansand.