Abstract
Within an open system of cities, compensating differentials theory predicts that local real estate prices will be higher in cities with higher quality non-market local public goods. In this case, more polluted cities will feature lower home prices. A city’s air pollution levels depend on economic activity within the city and on cross-border pollution externalities. In this paper, we demonstrate that air pollution in Chinese cities is degraded by cross-boundary externalities. We use this exogenous source of variation in a city’s air pollution to present new robust estimates of the real estate impact of local air pollution. We find that reductions in cross-boundary pollution flows have significant effects on local home prices. On average, a 10 % decrease in imported neighbor pollution is associated with a 0.76 % increase in local home prices. We also find that the marginal valuation of clean air is larger in richer Chinese cities, and hukou barrier of labor migration has been further phased out.
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Notes
Particulate matter less than 10 μg in diameter, i.e. finer particles, are typically used in health damage assessments.
Some scholars have examined the relationship between the air quality and housing price in Hong Kong. For example, Chau et al. (2006) find air pollution has a significant negative impact on property prices, based on their semi-log regression, roughly an increase of 0.1 μg/m3 in the air pollution level (suspended particulates) lowers property prices by 1.28 %. Edgilis (2009) conduct a conservative estimate in the west and central area of Hong Kong, and find that a 10 % drop in the level of SO2 emissions can raise property value by 3.2–3.9 %, and a 20 % drop in SO2 emission can raise housing price by 6.5–7.9 %.
Total suspended particles (TSP) measures the mass concentration of particulate matter in the air. Within TSP, PM10 stands for particles with a diameter of 10 μm or less, and PM2.5 stands for those with a diameter of 2.5 μm or less. Particulates that are 10 μm or greater are filtered and generally do not enter the lungs. Particulates smaller than 10 μm are likely to enter the lungs. Particulate matter that is smaller than 2.5 μm (PM2.5) can enter into the Alveoli where gas exchange occurs. Throughout the world, ambient monitoring now focuses on PM10 and PM2.5.
The quality of China’s API data has been debated . For instance, Wang et al. (2009) found his self-measured PM level in Beijing during Olympic period is correlated with official API, but 30 % higher. Andrews (2008) pointed out a likely systematic downward-bias around the “Blue Sky” standard (API less or equal to 100), and also highlighted a sampling downward bias for dropping monitoring stations in more pollution concentrated traffic areas in Beijing. These studies triggered some concerns on the measurement errors using Chinese official API data. Later studies suggest that Wang’s measurement gap between the self-measured data and official API data is mainly due to sampling and methodological differences (Tang et al. 2009; Yao et al. 2009, Simonich 2009).A recent paper by Chen et al. (2011) use both API and AOD data to analyze the changes before and after Beijing Olympic. Their study suggests that the two different data sources provide similar results. In our study, we convert API index back to PM concentration data using the SEPA API formula. Andrews (2008) shows that this approach is reliable, especially when the main purpose is to study the cross-city variation for a large number of cities.
Such reduced form estimates have been reported in U.S studies such as Kahn (1999).
Recent atmospheric chemistry studies have documented the extent of cross-boundary pollution exports. Tong and Mauzerall (2008) highlight the importance of interstate emission transfer on local air quality, they use the CMAQ model simulate and construct a source-receptor matrix for all continental states of U.S. They found out over 80 % of the contiguous states, interstate transport of NOx emissions is more important than local emissions for summertime peak ozone concentrations. Liu et al. (2008) conduct a similar source-receptor matrix of sulfur emissions focusing on East Asian emissions on other continental regions, they find that present-day East Asian SO2 emissions account for at least 20 % of total sulfate concentrations over the North Pacific at the surface, and East Asian SO2 emissions account for approximately 30–50 % and 10–20 % of background sulfate at the surface over the Western and Eastern US. Saikawa et al. (2009) also apply MOZART-2 model, and find out China’s aerosol emissions contribute significantly over neighboring regions by applying global models of chemical transport (MOZART-2) model. They estimate that, in the Korean peninsula and Japan, an annual average concentration of 1.4 μg/m3 of PM2.5 results from China’s aerosol emissions.
We collect monthly wind direction data of 287 prefecture-level cities (For the cities missing this data, we think the wind directions are almost the same as the nearby city/town) on China Meteorological Data Sharing Service System (http://cdc.cma.gov.cn/). After merging the wind directions (16 categories) into four common ones, we define dominant wind direction of a city in a standard year as monthly main wind direction(s) appear most in 12 months.
To better measure the imported pollution from all neighbor cities, we use the smoke emission information of all 287 prefecture-level (or above) cities to construct this NEIGHBOR variable.
Ideally we could also incorporate information on the direction and velocity of the sandstorm, which are different for different cities. Unfortunately we do not have access to accurate information. We test the robustness of our results by considering the relationship between the sandstorm’s direction and the city’s spring dominant wind direction (measured by the angle between these two. The main findings are robust to across to these changes (available upon request).
The exchange rate is roughly 7 RMB per U.S dollar.
We acknowledge that we have a relatively “short” list of city attributes compared to the U.S quality of life literature due to data availability constraints. For example, we are unable to find city-level crime information.
Our instrumental variables approach exploits exogenous variation in a city’s PM10 level (due to imports of emissions). This approach addresses the concern that a city’s pollution is caused by such local factors as booming industries and a rich populace that can afford to own and drive diesel vehicles. As we discussed above, such factors will bias the OLS estimate of PM’s implicit price to zero.
We find that the coefficient of MANU in the IV regressions is larger than that in OLS. This is consistent with the downward-biased PM coefficient in the OLS regression in which booming manufacturing activities increases both labor demand and local air pollution simultaneously.
In the first stage, the coefficient of ln(NEIBHOR) is 0.103, so a 10 % decrease of NEIGHBOR will cause a 1.03 % decrease of ln(PM), and then 0.76 % decrease of home price (1.03 % × 0.739 = 0.76 %).
It is important to note that we include a city’s population in each of our hedonic price regressions. This population variable is likely to proxy for local productivity effects as the population will move to those areas that are more productive.
In our 2010 RSUE paper (Zheng et al. 2010), we included the PM measure in levels in our home price hedonic regressions. Here we include the PM measure in logarithm. It is still significant but the t-statistic is smaller. To further verify the consistence between the two estimate versions, we estimate the regression in Column (7) with PM measure in levels. Its coefficient is statistically significant at 5 % level (t = 2.15). In this paper we keep PM in logarithm for the sake of easily calculating elasticities.
The hukou system, put in place in the 1950s, was to register people by their hometown origin and by urban versus rural status for the purpose of regulating migration. In the wake of transition to a market economy, the hukou’s regulation on population mobility was relaxed. Population mobility, especially rural to urban migration, was substantially elevated in the 1990s when urban housing market and labor market were liberalized and private sector employment grew rapidly with the inflow of foreign direct investment (FDI) to Chinese cities. Nevertheless, hukou remains important for rationing access to local public services and social security benefits; residents without local urban hukou can be denied access to public schools, public health care, public pensions and unemployment benefits in the city. hukou regulations are being eased in many Chinese cities, but the hurdles for getting hukou in major cities remain high and few rural migrant workers could expect to overcome them. A recent study at the Beijing Institute of Technology estimates that, tens of millions of people living in cities without urban hukou are denied access to these public services. (“Mismanaging China’s rural exodus.” Financial Times, 2010-03-12, http://www.ftchinese.com/story/001031699.)
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We thank conference participants at the 2011 Asia-Pacific Real Estate Research Symposium held in South Australia for insightful discussions, and Gangzhi Fan, Seow Eng Ong, K. W. Chau, Ed Coulsen and an anonymous referee for excellent comments. This paper is supported in part by the National Natural Science Foundation of China (70973065, 70803026, 71173130 and 71273154), Program for New Century Excellent Talents in University (NCET-12-0313) and Tsinghua University Initiative Scientific Research Program.
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Zheng, S., Cao, J., Kahn, M.E. et al. Real Estate Valuation and Cross-Boundary Air Pollution Externalities: Evidence from Chinese Cities. J Real Estate Finan Econ 48, 398–414 (2014). https://doi.org/10.1007/s11146-013-9405-4
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DOI: https://doi.org/10.1007/s11146-013-9405-4