House Prices and the Value of Amenities

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House Prices and the Value of Amenities

œ How much does an additional bedroom adds to the house price?

œ Does better school quality in the neighborhood increase the value of homes?

œ How does crime rate affect house prices?

œ How much do people value a new park in their neighborhood?

œ How much do people value reduction in the crime rate?

œ How much do people value lower air/noise pollution?

œ How much do people value more trees in their street?

œ How can we measure the benefit of clean water?

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Hedonic function
Grocery bag E P X t RX z t RnXn
Ez P Xi PaXE t t PnXn

EN store.
œ Imagine your trip to the grocery

œ How do you calculate your total expenditure?

œ Now suppose you do not know the price of each item but you observe:
œ People’s total expenditure
œ All the items in their grocery bags E BX EX a t BnXn
œ Can you predict the price of each item?
pt I
Estimated price implicitprice

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Hedonic function
Housing- Rosen (1974)

Housing is a bundle ofdif characteristics

œ Similar to a grocery bag, a dwelling is bundle of attributes like floor size, number of
bedrooms, bathrooms, ..., neighborhood amenities like crime rate, pollution, ...

œ How can we find the value of each attribute?

before: max u(c, q) st . c + pq = y
c,q

now: max u(c, a 1 , ..., a n ) st . c + P (a 1 , ..., a n ) = y

c,a 1 ,...,a n

batons
B Bundle Faithrms size amn
entities crime rate schools
of
variable inthebundle
Canfindtheimplicitprice ofthe
ofhaving lower winein
neighborhood
Whatisthevalue
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Hedonic function Pla Uca
Housing: demand side
my y fatty o

a marginal utility p Ia Fa mu
œ suppose we can simplify all amenities demand side bid
into one and call it design quality.

œ also suppose we can write utility in a

BloofDmuthereis a
simplified following form concaveslope

slopeismarginalutility
max u(c, a) = c+u(a) st . c+P (a) = y
c,a Icflattensdue toDMV
ofdesign
quality
œ the bid curve shows the maximum
amount that a household is willing to th UCC a L
pay for a given utility everyunit
for
item Highutility
bemorecostly i
g i
a
forcurveitijusto 5 / 20
 f
Hedonic function
maxi
Housing supply side
a Ita It Me
offer
blot marginalcost P supplyside
MCis higherasyouproducemore
œ The profit of producer of a is

A °C ost (a)
º = P (a) 4

œ The offer curve shows the minimum

amount that a producer is willing to profit
Higher
receive for a given profit

et
It
vower

meansconstant a
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Hedonic equilibrium
offer
P mo
p bid

am
œ In equilibrium the slope of offer curve
and bid curve are the same. why?

When offer bid are tangent

me
If MU

a
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Bid curve for high and low demand households

p
higher utility forhigh
amentities

A
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Bid curve for high and low cost producers

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Hedonic curve

É
Pnf a X
hedonic curve

tuned__
linear
doesn'tneedtobe

N Man Ta mo mu

1 A
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Hedonic regression bed t bed size t size
McMillen and McDonald (2014)
In p n

œ most hedonic studies use exponential function P = exp(Æ0 + Æ1 F + ... + Ær X )

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How much do people value reduction in the crime rate?
Rosen 1974 version
PI n
p crime A inverse relationship Mu c o

t
max u(c, crime , a) = c + Ø £ crime + u(a) st . c + P (crime , a) = y =)
c,crime ,a
g
P (crime , a)
max y ° P (crime , a) + Ø £ crime + u(a) =) °d =Ø MO
crime ,a @crime
Lage
œ The hedonic analysis is useful when you are looking within a city. If you look at
multiple cities it is not correct. why?

Why
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How much do people value reduction in the crime rate?
Rosen-Roback version
crime
Pr p bed
IBD

P = c p + a p crime + bZ
y = c w + a w crime + d X

œ The marginal value of crime for households is a p + a w and their total loss from crime
is (a p + a w ) £ crime

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Discussion

œ Hedonic model is a useful tool for price indexes

œ Finding the "explicit price" of attributes is not easy and hedonic model does not help.
why?

œ How can we address endogeneity problem? (IV, regression discontinuity, natural

experiments)

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Water pollution
DOES HAZARDOUS WASTE MATTER? EVIDENCE FROM THE HOUSING MARKET AND THE SUPERFUND
PROGRAM, Greenstone and Gallager, (QJE, 2008)

P nd waste 500
it
I 1 I l
100
control groups
treatmentgroups

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Toxic plants
Environmental Health Risks and Housing Values: Evidence from 1,600 Toxic Plant Openings and Closings, Janet Currie,
Lucas Davis, Michael Greenstone, and Reed Walker, (AER, 2015)

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Crime
Estimates of the Impact of Crime Risk on Property Values from Megan’s Laws, Linden and Rockoff (AER, 200g)

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School Quality
Neighbourhood, school zoning and the housing market: Evidence from NewSouth Wales, Tchatoka and Varvaris, (JHE,
2013)

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School Quality
A Unified Framework for Measuring Preferences for Schools and Neighborhoods, Bayer, Ferreira, McMillan (JPE, 2007)

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Trees
Cool Cities: The Value of Urban Trees (L. Han, S. Heblich, C. Timmins, Y. Zylberberg)

nd trees
MP

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