Wednesday, 12 July 2017

Strip clubs, externalities, and property values in Seattle

Property values tend to reflect not only the characteristics of the property itself, but also the neighbourhood that the property is located in. This is hedonic pricing - the price of a property reflects the sum of the values of all of the characteristics of the property. If the property includes a dwelling, the price reflects the quality and size of the dwelling, number of bedrooms, bathrooms, whether it has off-street parking, and so on. But the price also reflects the access of the property to local amenities, such as good schools, public transport, and so on (for example, see this post from earlier this year).

But not all local amenities are positive. Some features of the neighbourhood might create disamenity, reducing property prices. One example may be strip clubs. If a strip club attracts unsavoury people and petty (and not-so-petty) crimes, then fewer people will want to live in that neighbourhood, reducing demand for properties in that area and consequently reducing property prices. Another way of thinking about this is that the strip club creates a negative externality on local property owners (an externality is the uncompensated impact of the actions of one party - in this case the strip club locating in a particular neighbourhood - on others, in this case the local property owners).

There is evidence to suggest that some facilities do create disamenities that negatively affect property prices, including meth labs and toxin-emitting industrial plants. But what about strip clubs? A recent working paper by Taggert Brooks (University of Wisconsin - La Crosse), Brad Humphreys and Adam Nowak (both West Virginia University) looks at relevant data for Seattle.

Specifically, Brooks et al. looked at repeated property sales (where the same property was sold multiple times) over the period 2000-2013, a period during which a moratorium on new strip clubs in King County (which includes Seattle [*]) was removed. Using repeated property sales gets around the problem of accounting for the different quality of different properties (provided you assume that property quality doesn't markedly change between sales). Their dataset included over 317,000 property sales, of which about 5,400 were within 2000 feet of a strip club.

What did they find? A whole lot of nothing. In their preferred specification of the mode, the results:
...indicate that the presence of an operating strip club is not associated with any differential in residential property prices over this period. These results indicate price dynamics for those properties within K of an operating strip club are no different from price dynamics for properties between K and 1 [mile] of a strip club.
There did appear to be some weaker evidence that condominium prices were lower when a strip club was nearby though:
However, the results using the condominium sub-sample, and the single family home sub-sample, provide weak evidence that strip clubs are associated with residential property price differentials in some cases... condominiums located within 1000 feet of a strip club have transactions prices about 5.5% lower than condominiums located farther from operating strip clubs. Some weak evidence also suggests that condominiums within 500 feet also sell for lower prices...
These results are interesting, but are based on only a small amount of variation in the sample. If I read the paper correctly, there were only 370 properties that were sold multiple times, where there was a nearby strip club at the time of one of the sales and no nearby strip club at the time of the other sale. So, given the small number of 'identifying observations', I'd be much more cautious than the authors about interpreting the lack of statistical significance here as suggesting that strip clubs have no effect on property values. I would be more inclined to say that they may have an effect, but this study didn't have sufficient statistical power to detect the effect. Although statistically insignificant, the point estimate of the effects from their preferred specification suggests that property prices are 6.5 percent lower when there is a strip club within 500 feet, 2.9 percent lower within 1000 feet, and 1.6 percent lower within 2000 feet. That is quite a large effect.

It would also be interesting to see if similar results obtain for other cities in the U.S. and elsewhere. It also suggests to me that we could use a similar approach to evaluate the negative effects of alcohol outlets in New Zealand. Something to follow up later.

[HT: Marginal Revolution last year]


[*] Yes, as I mentioned in an earlier post I was in Seattle a couple of weeks ago and no, it wasn't to collect observational data on strip clubs. My wife was with me and can attest to the lack of strip clubs in our itinerary.

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