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The Price of Aesthetic Externalities

FAME Working Paper No. 98

31 Pages Posted: 20 Dec 2003  

Steven C. Bourassa

Florida Atlantic University

Martin Hoesli

University of Geneva - Geneva School of Economics and Management (GSEM); University of Aberdeen - Business School; Swiss Finance Institute; University of Geneva - Geneva Finance Research Institute

Jian Sun

University of Louisville - School of Urban & Public Affairs

Date Written: November 2003

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

Suggested Citation

Bourassa, Steven C. and Hoesli, Martin and Sun, Jian, The Price of Aesthetic Externalities (November 2003). FAME Working Paper No. 98. Available at SSRN: https://ssrn.com/abstract=477782 or http://dx.doi.org/10.2139/ssrn.477782

Steven C. Bourassa

Florida Atlantic University ( email )

777 Glades Road
Boca Raton, FL 33431
United States
5028077642 (Phone)

Martin Edward Ralph Hoesli (Contact Author)

University of Geneva - Geneva School of Economics and Management (GSEM) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

Swiss Finance Institute ( email )

24 rue du Général-Dufour
Geneva, CH - 1211
Switzerland

University of Geneva - Geneva Finance Research Institute ( email )

Geneva
Switzerland

Jian Sun

University of Louisville - School of Urban & Public Affairs ( email )

426 W. Bloom Street
Louisville, KY 40292
United States

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