Government spending on infrastructure is vital to economic growth in many countries, including the United States.

In the short term, road and facility projects put people to work and surrounding property owners get the advantage from rising real estate values. They can spark private investment that further enhances communities, and residents enjoy a higher quality of life, whether it's an enhanced sewer system, brighter streetlights, or smoother roads. But it’s difficult to measure the impact and also who reaps the biggest rewards.

A paper in the July issue of American Economic Journal: Applied Economics looks at evidence from Mexico to answer these questions. Authors Craig McIntosh, Tito Alegria, Gerardo Ordonez, and Rene Zenteno track the impact of $68 million in spending on road paving, public water, sewer, sidewalks, and other infrastructure through the Habitat Program that was allocated to poor neighborhoods in 60 different municipalities.

Property values rose substantially. Between 2009 and 2012, land values in neighborhoods that received upgrades increased an additional $5.76 per square meter compared to a control group. That translates to a rate of appreciation was nearly triple that of areas where no upgrades were done.

Figure 2 from McIntosh et al. (2018)

The figure above estimates the impact that the infrastructure investments had on real property prices between 2009 and 2012.  It tracks the cumulative distribution function, or "CDF," of the changes in real property prices in neighborhoods that received the upgrades (the green dotted line) compared to a control group where no improvements were made (the solid orange line).

The shift to the right in the treatment indicates that infrastructure improvements increased housing values across the board, for inexpensive and expensive houses alike. 

The authors find that the program generated total increases in property prices of about $2 for every $1 spent on the program. That's a higher rate of return than most US infrastructure projects and an indication of underinvestment in urban infrastructure in Mexico, the authors say.