The rising demand for subway after private driving restriction: Evidence from Beijing's housing market

• This paper studies to what extent subway demand increased after Beijing imposed restrictions on private driving in October, 2008.
• Utilizing a pseudo-repeat sale approach, we mitigate the omitted variables problem in the hedonic method.
• We estimate a 1.8 to 2.7 percentage point increase in people' s willingness to pay for subway proximity.
• Locations where subway travel time can better match that of car experience relatively higher housing price appreciation.

This paper studies to what extent subway demand increased after the Beijing city government imposed restrictions on private driving in October, 2008. Utilizing a pseudo-repeat sale approach in a short sample period that includes 6 months before and after this exogenous shock, we mitigate the omitted variables problem, a common limitation in existing subway capitalization studies. We estimate the incremental effect of subway capitalization, and infer a 1.8 to 2.7 percentage point increase in people's willingness to pay for subway proximity, which is roughly 36% to 60% of the initial price premium for subway proximity. This increase is mainly due to the change in transportation mode following the driving restriction policy. We also find that the increase in demand for subway proximity exhibits significant spatial heterogeneity. Locations where subway travel time can better match that of car travel experience relatively higher housing price appreciation. Moreover, we find evidence that the increase in subway premium persists over time. Our estimation provides a basis for a sound cost–benefit analysis regarding how much and where the government should increase the supply of subway services after imposing restrictions on private driving.