The Price of Aesthetic Externalities

Abstract

This paper explores the prices of three aesthetic externalities (the presence of a water view, the appearance of nearby improvements, and the quality of landscaping in the neighborhood) in residential property markets. In particular, we focus on how the implicit prices of such characteristics change with the residential real estate cycle. Given that the supply of these attributes is limited, one would expect their implicit prices to vary with the real estate cycle, contrary to what would be expected for the prices of property characteristics that are in relatively elastic supply. We also examine how the price premium for a water view varies across cities with the supply of such views. The empirical analyses are performed using hedonic models and a rich database of all residential sales transactions from 1986 to 1996 for the three largest urban areas in New Zealand - Auckland, Christchurch, and Wellington. Our results suggest that implicit prices of the aesthetic externalities move with the real estate cycle. We find also that the percentage premiums for water views are greatest in Christchurch, which has the smallest percentage of properties with water views, and lowest in Wellington, which has the highest percentage of properties with views. A good understanding of the impact of these variables is important for the valuation of residential properties.

Keywords: Hedonic models, aesthetic externalities, views, real estate valuation, New Zealand

JEL Classification: R31, R21