Environmental Quality and Real Estate

Increasing demand for greenness

Conceptual model

Using the EKC model, PM10 data cross 85 cities in China from the year 2003 to 2012, we estimate that the “turning point” in an EKC model for Chinese cities is 13,000 US dollars. In this model we controlled by population, manufacturing share and precipitation level. Out of the 85 cities in the dataset, there were 33 cities in 2012 that have passed the turning point.

We find that when income and education attainment level increase in cities, their citizens’ demands for risk reduction, health and quality of life, also increase. Using revealed preference in the housing market and self-protective behaviors, we illustrate the demand for quality of life is increasing among Chinese urban citizens.

Revealed preference evidences in the housing market

By studying the impact of air pollution on housing prices, we observe that people’s demand for clean air is capitalized in the housing market. 

Our study of land and residential property market in Beijing, using the classic hedonic housing price model and the new housing transaction data, proves that public goods adds a premium to housing prices. The significant factor includes proximity to universities, as well as better air quality, which gives evidence that people are willing to pay more for clean air and the access to quality educational resources. Also, considering the cross-boundary effect of air pollution, we use instrument variables and find that a decrease in imported neighbor pollution by 10 percent will accompany with a 0.76% increase in local home prices. Cities with higher ambient pollution levels have lower housing prices. Through the years, the capitalization for quality non-market amenities kept rising.

Energy consumption is another concern regarding environmental attributes

The floor area of new residential buildings certified by the Chinese Green Building Label system only account for 0.8% of the floor space under construction in 2013. The incentive for developers to build green housing largely depend on homebuyers’ willingness to pay. As residential utility rate is relatively low in China, it gives little incentives for purchasing green buildings. However, our empirical study suggests that there are people who are willing to pay extra for green housing.

We examine the role of information of building performance in affecting homebuyers’ decision and willingness to pay in green buildings. Through a treatment experiment, our study suggests that homebuyers have significantly higher willingness to pay for green housing if they acknowledge concrete information about the performance. The non-green residential group has a significant increase in their willingness to buy the green building. The price they were willing to pay was almost the same with those who already live in the green building. This result suggests that people have equal incentives to purchase green buildings if solid proof of better building performance is available.

Responses from the government

Government’s regulations and investment play a key role in mitigating environmental externalities. Our empirical studies suggest that cities’ environmental quality plays a role in local official’s political promotion.

The incentive for local official taking actions in environmental investments and regulations come from two directions: one being the central government, and another being the general public. In this sense, local officials are “sandwiched” by the central government and general public.

The incentive of the central government comes from three aspects. First, the demand for green amenities is increasing among middle-class urban residents.  Second, the central government is concerned with domestic energy security and they have the ambition to make China the world leader in the nascent clean energy technology market sector. Third, the central government wants to prove to the public, despite the fact that being a one-party political system, it is still legitimate. GDP growth is no longer the sole criteria for official’s promotion; the central government adds environmental performance as part of the checklist for government officials.

From economic side, since local government depends heavily on land sale revenue, they have the incentive, to raise land sale price. As land prices depend heavily on the quality of local amenities, they have the incentive to improve the environmental qualities of their cities.

Wealthier cities have fewer incentives to restrain environmental regulation goals, while more impoverished cities have to give priority to jobs and economic goals. Our studies show that in a city with higher per capita income and education attainment, the city government is more likely to make regulations and mitigate environmental pollutions. Cities rely on tourism are also more incentivized to keep environment clean. In our study, we also find that younger mayors have more incentives to implement environmental regulations. Older mayors, may have little incentive to get promoted, or they find the comfort zone to stay with their established networks. On the contrary, young mayors are more ambitious in getting promoted in the political system, so they stick to the guidelines from central government.