Does information about environmental quality matter for residential sorting?

Institute for Transport Studies (ITS) research seminar with speaker Samuel Lindgren, VTI, Sweden.

Residential mobility influences segregation and gentrification and matters for environmental justice concerns. Existing research has shown that environmental amenities are potentially significant drivers of residential sorting. However, less is known about sorting responses to information about environmental amenities, despite the documented importance of information for housing markets.

This study analyzes whether residential sorting responds to information about future levels of environmental quality. I exploit changes in expectations resulting from a public announcement of the renewal of an airport operating contract. I implement a difference-in-differences estimator that compares home buyer characteristics in residential areas exposed to aircraft noise from the airport to the same outcomes in areas outside the noise exposure zone.

I find that home buyer income dropped by 20 per cent in the noise zone after the announcement, compared to the households locating outside. The probability of home buyers being among the top earners decreased by ten percentage points and the likelihood of a household with children reduced by 21 per cent. There is no evidence of sorting in terms of educational attainment or age. These results show that information about future environmental quality leads to residential sorting driven by income and presence of children.

I subsequently investigate effects on two other housing market dimensions. First, I test if the announcement affected the standard of houses purchased. I find that although high-income households and households with children sort away from the noise zone after the announcement, those who do purchase a home in the noise zone opt for one with larger and more valuable dwelling and lot areas. I interpret this as households trading off environmental quality with housing standard in their location decision.

Second, I examine the effect of the announcement on housing prices. I show that house prices in the noise zone are largely unaffected when changes in housing composition are not accounted for. Average prices are if anything slightly higher, which is consistent with the documented increase in housing standard. Adjusting for housing attributes produces an estimate of a price drop of five per cent, which presumably reflects the reduction in future levels of environmental quality.

These results have two main implications. First, measures that improve environmental quality in a neighbourhood does not benefit all residents originally exposed to the pollution in the presence of residential sorting. Second, the willingness to pay for the environmental quality of new residents is likely to be different from that of the original residents. 

Bio: Samuel Lindgren, VTI, Sweden.