Environment and value Does drinking water quality affect house prices?
| Published date | 01 December 1999 |
| Pages | 444-463 |
| Date | 01 December 1999 |
| DOI | https://doi.org/10.1108/14635789910294877 |
| Author | François Des Rosiers,Alain Bolduc,Marius Thériault |
| Subject Matter | Property management & built environment |
JPIF
17,5
444
Journal of Property Investment &
Finance, Vol. 17 No. 5, 1999,
pp. 444-463. #MCB University
Press, 1463-578X
Received March 1998
Revised April 1999
ACADEMIC PAPERS
Environment and value
Does drinking water quality affect house
prices?
FrancËois Des Rosiers
Urban and Real Estate Management, Laval University, Canada
Alain Bolduc
Ministry of Transport, Quebec Government, Canada, and
Marius TheÂriault
Geography Department, Laval University, Canada
Keywords Modelling, Urban environment, Environmental monitoring, Property valuation
Abstract This research paper investigates the effect of drinking water quality on property
values in Charlesbourg, a major municipality (70,000 inhabitants) of the Quebec City region
where repeated water-related health problems were experienced in 1990 and 1991. In this paper,
807 bungalow sales are sampled from the data bank of the Quebec Urban Community (QUC)
Appraisal Division, and environmental information pertaining to local drinking water quality
levels supplements data on physical, neighbourhood and access attributes. Our findings indicate
that water-related health hazards exert a detrimental and measurable impact on higher property
values, with the average duration of the warning period per sector clearly emerging as the
dominant factor. More precisely, market segmentation suggests that the higher the price of the
property, the sharper the decline in market value because of this factor. In the current case study,
the most severely affected properties of the upper third segment of the market experienced drops
in value ranging from 5.2 to 10.3 percent of mean sale price.
Introduction: research context and objective ± hedonics and the
measurement of urban externalities
In the past two decades, environmental issues attracted attention in the
economic and real estate literature, particularly with respect to their impact on
property prices. Several analytical approaches are currently being used to
measure negative urban externalities and the extent to which they are
internalised into real estate values (Furby et al., 1988; Kinnard and Dickey,
1995; Hamilton and Schwann, 1995). Well known to property appraisers, the
paired sales analysis approach compares the price structure of a sample of
This research was funded by the Social Sciences and Humanities Research Council of Canada (#
410-96-1104) and by the FCAR Research Fund (Quebec). The authors wish to thank the
Appraisal Division of the Quebec Urban Community and its Director, Mr Jean-Guy Kirouac, as
well as the Ministry of the Environment of Quebec for providing the data on drinking water
quality in Charlesbourg. Finally, the contribution of research assistants JoseÂe Bouchard and
E
Âric Tremblay should be mentioned, together with that of Professor Peter Clibbon who kindly
agreed to comment on the style of the paper.
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Academic papers:
Environment and
value
445
properties affected by a given externality to that of similar properties not
subject to the latter. While valid under restrictive conditions, such an approach
is somewhat speculative because the inherent heterogeneity of residential
markets makes it difficult to isolate the price impact of a particular attribute.
As for the contingent valuation (survey) approach, it is highly criticised
because of its methodological bias. As it is based on property owners' ± or
would-be owners' ± individual perceptions or intentions, it remains highly
subjective and rarely allows for a reliable pricing of externalities (Kinnard et al.,
1996). Despite its inherent weaknesses (Rosen, 1974), the hedonic approach
remains the most reliable tool for such a purpose as it reveals buyers'
perception of any potential environmental hazard through their actual pricing
behaviour. It aims to explain property values on the basis of house
characteristics, physical as well as neighbourhood-related. Using multiple
regression analysis, it can thus isolate the respective contribution to market
value of each attribute of the residential bundle, hence its growing popularity
among urban economists and property appraisers.
Numerous environment-oriented hedonic analyses have been carried out on
the residential market since the early 1980s. The vast majority deal with issues
such as air and sea water pollution (Diamond, 1980; Brookshire et al., 1982;
Palmquist, 1984, 1988; Graves et al., 1988; Murdoch and Thayer, 1988; Kask
and Maani, 1992; Mendelsohn et al., 1992), the nearby presence of landfill,
incinerator and nuclear plant sites (Nelson, 1981; Gamble and Downing, 1982;
Smith and Desvousges, 1986; Cartee, 1989; Michaels and Smith, 1990; Zeiss,
1989, 1990; Mundy, 1992; Nelson et al., 1992; Ketkar, 1992), as well as airport
and highway proximity (Nelson, 1980; O'Byrne et al., 1985; Pennington et al.,
1990; Uyeno et al., 1993). The impact of chemical contamination (Ford and
Gilligan, 1988), the proximity of a pipeline (Kask and Maani, 1992), the presence
of trees in the neighbourhood (Orland et al., 1992) and the impact of
earthquakes (Murdoch et al., 1993) have also been investigated. Finally,
measuring the impact of power lines on property values has become an active
research area for hedonics as a number of recent studies demonstrate (Colwell
and Foley, 1979; Colwell, 1990; Kinnard, 1990; Kroll and Priestley, 1991;
Hamilton and Schwann, 1995; Kinnard and Dickey, 1995; Kinnard et al., 1996).
Quite understandably, effects on house prices vary with the type of externality
considered. For instance, according to Nelson et al. (1992), the presence of a
landfill within two miles from a property can cause its value to drop by 6
percent whereas house prices may depreciate by some 9 and 10 percent as a
result of noise from a nearby highway or airport respectively (Emerson, 1972).
Finally, in the case of proximity to power lines, the detrimental effect on values
is estimated at about 10 percent by Delaney and Timmons (1992). While not all
authors agree on the way negative externalities should be measured, most
studies are conclusive with regard to the relevance of the hedonic approach for
assessing the extent and direction of environmental impacts on property prices.
Yet, very little if any research has been conducted on the effect of drinking
water quality on house values, despite the growing concern about possible
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