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Effect of Water Quality on Lakefront Property Values
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Newsletter: | Volume: III # 12 December, 1996 |
Source Reports: | Holly, Michael J., Kevin J. Boyle and Roy Bouchard "Water Quality Affects Property Prices: A Case Study of Selected Maine Lakes" Maine Agricultural and Forest Experiment Station, University of Maine, Miscellaneous Report 398 February 1996. |
Subject: | 1. Benefits Analysis 1. Benefits Analysis - Valuation 1. Benefits Analysis - Valuation - Revealed Preference 1. Benefits Analysis - Valuation - Revealed Preference - Property Value |
Environmental Media/Problem: | b. Water b. Water - Surface |
| Newsletter Article Text: | |||||||||||||||||||||||||||||||||||||||
| Researchers at the Maine Agricultural and Forest Experiment Station have developed a hedonic property value model for Maine lakes. Continuous variable parameters in hedonic models are the marginal values of a housing characteristic in an equilibrium market. For instance, if the coefficient for the square foot of building is 50, the average homebuyer will pay an additional $50 for a 1 square foot increase in house size. Assuming a linear relationship, if two homes are the same, but one has 100 square feet more than the other, the market will value the larger home at $50 x 100 = $5,000 more. A second bathroom may have an implicit value of, say, $2,500. A house with lake frontage may be worth $25,000 more than a comparable house not on the lake at a specific level of water quality. The same house may only be worth $10,000 more if water quality deteriorates. The coefficient estimates present values of expected future benefits. The authors, Michael J. Holly, Kevin J. Boyle and Roy Bouchard, examine the effect of eutrophication, which is measured by dissolved oxygen levels, chlorophyll levels and secchi disk measurements. Secchi disk measurements are the most observable to the public. Clarity and property values do not have a linear relationship. Below six feet changes in water clarity are not visible to the naked eye. The model uses actual sales data near 34 Maine lakes. The two water quality variables used are (1) the minimum secchi disk measurement in the year of the sale, and (2) the secchi disk measurement in the year the property was sold plus the ten year average. Lakes were placed into four geographical groups. The study concludes that, all else being equal, a one meter improvement in lake water clarity results in average changes in property prices ranging from $11 per lake front foot to $200 per lake front foot. The change in aggregate property value for a one meter change in water clarity for three of the lakes is shown in the table below: PROPERTY PRICES AND WATER CLARITY
The social damages from a marginal degradation of water quality are 44 percent to 100 percent greater than the social benefits from a marginal improvement of water quality. The water quality clarity coefficients are significant at the 95 percent or 99 percent level for all four groups. The water quality trend coefficient is significant for only one of the four groups. | |||||||||||||||||||||||||||||||||||||||
