299 – Are higher house prices a benefit or a problem?

In the research reported in PD298, we used the impact on house prices as an indicator of the benefits of an investment in a public amenity. This is a well-established approach, but twice in recent times I’ve encountered an attitude that higher house prices are more of a cost than a benefit. Could that be right?

The issue that people have in mind when they raise this concern is housing affordability. This certainly is something that is worthy of attention. House prices in many parts of Australia (and other developed countries) are often so high that they place great financial stress on buyers with relatively low incomes or they result in too many people being excluded from the housing market.

However, talking to a former government minister last year, she said that measuring improved local amenity by the resulting rise in house prices was not acceptable because rising house prices are a problem for housing affordability.

housingAlthough I applaud her concerns for the welfare of low-income groups, her rejection of rising house prices as a measure of community benefits is not sound at all.

For one thing, it implies that rising house prices are a bad thing regardless of the cause of the rise. The logical extension of that thinking is that we would prefer completely impoverished suburbs with no amenities or services for residents. Let’s encourage crime, leave road potholes unrepaired, remove all street trees and encourage toxic industries to set up in urban areas. That would certainly result in affordable housing! This is obviously not the solution to the housing-affordability problem.

The second flaw in the politician’s logic was that it confused measurement with objectives. Improving the amenity of a suburb does result in benefits for the residents, and these benefits are reflected in the prices that people are willing to pay to become residents in that area. So the change in house prices that is attributable to the improved amenity is a sound quantitative measure of the benefits. There may also be spillover effects that are viewed as being negative, but the requirement then is to measure those negatives as well, not to reject the valid measurement of the benefits.

Thirdly, the politician is implicitly suggesting we should aim to achieve two different policy objectives (affordable housing and improved urban amenity) using only one policy mechanism, the decision about whether to invest in urban amenity. An important economic insight, known at Tinbergen’s Rule, says that you need at least one policy mechanism for each policy objective – in this case, one related to urban amenity (e.g. investment in drain restoration) and a different one related to affordable housing (e.g. increased land releases). If you try to achieve two objectives with only one mechanism, the community will end up worse off overall than it might have been.

I was completely unprepared for the ex-minister’s comment at the time, and so dazzled by its many problems that I wasn’t able to quickly provide a very coherent counter-argument. I’ll be better prepared if it comes up again.

Further reading

Borrowman, L. Kazakevitch, G. and Frost, L. (2014). Measuring Housing Affordability: What Types of Australian Households are in Stress? Discussion Paper 42/14, Department of Economics, Monash University. Full paper ♦ IDEAS page

Polyakov, M., Fogarty, J., Zhang, F., Pandit, R. and Pannell, D. (2016). The value of restoring urban drains to living streams, Water Resources and Economics Journal web site ♦ IDEAS page

298 – Potential value from restoring urban drains

I remember as a child playing in the stormwater drains near my home in suburban Perth. The drains were straight, steep-sided, fenced off (to keep us out) and the banks were bare grass, but the water contained little fish, called gambusia, that we loved to catch, not caring that they were actually feral pests.

These days, there is growing interest in restoring urban drains to something approaching a natural stream, including natural vegetation on the surrounding land. In a study funded by the CRC for Water Sensitive Cities, we set out to measure the benefits from restoring a particular drain in Perth.

gambusiaThe drain in question was Bannister Creek, which is really close to my childhood home and those other drains I played in.

In 1979 the creek was straightened, deepened, and made into a traditional drain. During the 1980s and 1990s, the area was urbanised, leading to loss of the wetland system and riparian vegetation, nutrient-rich runoff from lawns and gardens, runoff from industry, and increased erosion and pollution problems in the catchment. Additionally, during high-rainfall events, the increase in the volume and speed of water surging through the now straightened and steeply-banked Banister Creek main drain had become a public-safety risk.

In response, a volunteer group formed (the Bannister Creek Catchment Group), with the aim of improving the creek/drain, including a project to rehabilitate a section of it to a “living stream”. The aim was that this would provide flood-mitigation, local amenity benefits, improved water quality, and slower flow velocity.

The restoration project, from 2000 to 2002, involved giving the creek a more natural shape, with meanders, riffles, fringing sedges, gentle sloping banks, and thick vegetation on the banks.

The transformation from drain to living stream can be seen in Figure 1, which tracks the evolution of the area through time.


Figure 1. Drain restoration over time.

Figure 2 shows the changes at ground level. They were pretty dramatic.


Figure 2. Before and after drain restoration.

To estimate the impact of these changes we examined changes in house prices in the area. We used a statistical model to separate out the various influences on house prices, so that we could isolate the influence of the drain restoration.

This approach means that we are capturing the benefits to local residents, but not possible benefits to others, and not ecological benefits that local residents are unaware of. We expect that the measured benefits would include aspects of amenity, recreation and environmental values.

The results were really interesting, and somewhat surprising in their magnitudes. We found that the restoration project had an influence on property prices over a distance of about 200 metres from the creek. Given that the restored section of the creek was about 320 metres long, quite a large number of property values were affected.

In the first few years after project commencement, property values in the area actually fell, probably reflecting a negative attitude to the substantial earthworks that were required.

However, by 2007 the impact had become very positive. On average, the sale prices of houses in the area rose eventually by an average of 3.9 to 4.7% due directly to the restoration project. Considering only these benefits, the costs of the project were only about 25 to 50% of the benefits.

Overall, the results were very encouraging about the prospects for this type of project to deliver worthwhile benefits to the community.

Further reading

Polyakov, M., Fogarty, J., Zhang, F., Pandit, R. and Pannell, D. (2016). The value of restoring urban drains to living streams, Water Resources and Economics Journal web site ♦ IDEAS page