Derived from consumer theory, the HPM relies on the proposition that an individuals utility for a good or service is based on the attributes that good or service possesses, and that the utility of the attributes can be measured separately.
In the absence of a direct market, and price, for environmental quality, the value of the latter is derived from the prices of surrogate goods, the most common of which is labour and property.
The property value approach (PV) consists of observing systematic differences in the values of properties between locations, and isolating the effect of ambient environmental quality on those values.
The prices of houses differ for a number of reasons if all the major explanatory variables can be statistically controlled, the residual can be taken as a proxy for an environmental attribute. Under certain conditions, changes in this value can be regarded a willingness to pay for environmental quality.
Non Linear Relationship Property Value Environmental Quality 10 Consumers Willingness to Pay for Environmental Quality Change in property value (WTP) c E0 wo E1 w1 d EQ1 EQ2 Adapted from Peace and Markandya (1989). 11
The hedonic pricing model
TechniqueMultiple regression analysis is used to determine how much of the observed differences in property values are due to differences in their environmental quality.
structural characteristics, (no of bedrooms, age of dwelling etc.)
socio-economic characteristics, (income, age, number of children, distance to CBD, etc.)
environmental attributes (distance to environmental attribute, green coverage, level of noise pollution etc.))
12 Functional Form
The relationship between the value of a property and its attributes is not always linear. The commonly explored functional forms are
1. Linear y a b .X
2. Log Linear log(y) a b. X
3. Negative exponential y a b .log(X)
4. Double log log(y) a b.log(X)
13 Data requirements and problems
The data requirements for hedonic pricing are quite large.
HPMs require data on all the principle features of the property influencing their values, including such intangible qualities as neighbourhood characteristics and prestige, and relevant socio-economic data on the households involved - such as income, family size, social class, etc.
The environmental variables also need to be specified and calibrated.
(e.g. for the degree of air or noise pollution).
14 Data Problems
15 Measurement error
Choice of variables
Measure of environmental attribute
Data reliability marginality.
Correlation between independent variables.
Frequently associated with structural characteristics.
Correlation matrix of independent variables
Form aggregate variables, increase the date set.
The HPM will only measure what people are aware of. For example, air pollution is not necessarily visible, therefore its impact on property values will only be detected in hedonic prices only if it is advertised or well known about (Mendelsohn et al., 1988).
18 Other types of hedonic pricing models
Wage based models
Often used to value poor working environments heat, pollution, risk of injury.
Like housing, wage differentials are assumed to depend on a number of factors including age, skills, education and location among others.
By controlling for these, the residual premium ( or discount in the case of a pleasant environment) is derived, and represents the extra wage needed to compensate workers for incurring environmental risk.
Overall, Pearce and Markandya, 1989, p.30 stated that
PV is particularly well suited to estimating the costs of air and noise pollution on the residential environment but it works poorly if the form of pollution is one whose effects are unclear to the individuals affected and which cannot be easily measured or quantified.
Prominent studies of urban amenity include Lake et al. (1998) who attempted to value the noise and visual intrusion of road development
Geoghagan (1997) who attempted to evaluate the impact of surrounding land uses including diversity and fragmentation
McLeod (1984) who attempted to value the impact of proximity to rivers, parks, highways
Pompe (1995) who attempted to value the impact of aircraft noise, road traffic, planned road widening and railway noise. Applications of the hedonic pricing technique to woodland and open space in rural areas include
Garrod et al. (1992) who valued proximity to woodland, marshland and open water
Correll et al. (1979) who valued proximity to greenbelts
Garrod et al., (1992b) who valued the amenity of forestry including the impact of forest type and
Tyrväinen (1997) who estimated the effect of urban forests on property prices.
24 Case Study REMINANT BUSHLAND IN BRISBANE
Hedonic pricing study Simon Hill (hons).
The hypotheses of this study are
1. that average property values reflect peoples willingness to pay to live in a neighbourhood characterised by more bushland cover and that property value is higher in such neighbourhoods
2. that property values reflect peoples willingness to pay to live within easy access to bushland and that property prices decrease as the access distance to bushland increases and
3. that property values reflect peoples willingness to pay to live adjacent to bushland and that property values increase with proximity to bushland.
25 Case Study 1. THE VALUE OF BUSHLAND IN THE BRISBANE CITY LOCAL GOVERNMENT AREA (LGA) 26 (No Transcript) 27 Types of Remnant Bushland
The City has four major bushland types
Eucalypt forest with heath understorey, and
Eucalypt forest with grass understorey.
28 Model and Variable Specification
Review of literature
In general, hedonic studies normally involve
a number of structural variables (eg. number of rooms),
a number of neighbourhood variables (eg. weekly income),
a number of accessibility variables (eg. distance to the central business district) and
environmental variables (eg. distance to remnant bushland) (Pearce et al, 1990 Pearce et al.,, 1989 Lake et al., 1998, Abelson 1979, Mcleod, 1984).
29 Results for the Brisbane City LGA Case Study 30 Case Study 2. TOOHEY FOREST CASE STUDY 31 (No Transcript) 32 (No Transcript) 33 (No Transcript) 34 Findings
The South East Freeway, Toohey Road, Kessels Road, Mains Road, Orange Grove Road and Logan Road all either border the forest, dissect the forest or impact negatively on the neighbourhoods that adjoin the forest.
The benefits of living in proximity to Toohey Forest are only identifiable once the influence of roads is controlled for.
This paper has indicates that the negative effect of roads in the study area is overriding the benefits associated with the presence of remnant bushland.