Air Pollution + Real Estate
Does air pollution from neighboring cities affect local real estate values? Evidence from Chinese cities.
Urban air pollution in China can originate from within the city and outside the city.
Air pollution ‘imports’ (cross boundary externalities) from neighboring cities have major public health and quality of life consequences. Certain households may be willing to pay higher housing prices for cleaner air.
We explored the role of neighboring pollution on local real estate prices.
We use data from 85 Chinese cities and looked at their PM10 concentration and city-level variables, such as income and economic activity. Cross-boundary pollution spillovers was used as an instrumental variable to provide more credible estimates.
We find that a decrease in pollution from neighboring cities significantly increases local home prices.
The Chinese urban population is enjoying increased income and the average urbanite is increasingly well educated. Such households are likely to be more willing to pay more to protect their health and thus willing to pay more to avoid urban air pollution.
We find that there is a higher willingness to pay for clean air in larger and richer Chinese cities.
The willingness to pay for clean air increases about 2.8x if the average resident gets a higher income. Households in larger cities (first-tier) are 3x more willing to pay for clean air.
The hukou system (housing registration system) constraint on labor mobility is likely to be further phased out. Before, workers could only work in a city if they were registered to a local hukou. After the phasing out, with a higher degree of free mobility, people can migrate to cities with a better quality of life. This mobility and higher quality of life will be reflected in higher capitalization in real estate prices.
We find that cities with higher entrance barrier have lower clean air price premiums. This is consistent with the theory that real estate prices in cities with barriers to entry are not as affected by 'imported' air pollution from neighboring cities.
Our results imply that public policies that reduce cross-boundary pollution flows between cities will simultaneously improve public health in the destination cities and lead to higher real estate prices.
MIT Sustainable Urbanization Lab, Department of Urban Studies and Planning,
Center for Real Estate
Johns Hopkins University and NBER
National University of Singapore
Shanghai University of Economics and Finance
Siqi Zheng, Jing Cao, Matthew E. Kahn and Cong Sun. “Real Estate Valuation and Cross-Boundary Air Pollution Externalities: Evidence from Chinese Cities”, Journal of Real Estate Finance and Economics, 2014, 48(3): 398-414.
Siqi Zheng, Matthew E. Kahn and Hongyu Liu. “Towards a System of Open Cities in China: Home Prices, FDI flows and Air Quality in 35 Major Cities”, Regional Science and Urban Economics, 2010, 40: 1-10.