Legalised marijuana sales and house prices

Does the community believe that legalising marijuana sales a good thing? There are both benefits and costs associated with legalising marijuana sales. Benefits might include easier access for recreational users (and higher consumer surplus), job opportunities in the marijuana sector, savings on policing and justice costs, and increased tax revenues (if marijuana sales or profits are taxed). Costs might include adverse impacts on public health, decreased productivity, and increases in crime. How do we weigh up these benefits and costs?

Hedonic demand theory (or hedonic pricing) recognises that when you buy some (or most?) goods you aren't so much buying a single item but really a bundle of characteristics, and each of those characteristics has value. The value of the whole product is the sum of the value of the characteristics that make it up. For example, when you buy a house, you are buying its characteristics (number of bedrooms, number of bathrooms, floor area, land area, location, etc.). You are also buying the bundle of local regulations for the area the house in located in, which includes whether marijuana sales are legal. So, controlling for all of the other characteristics of houses, comparing the price of houses in areas where marijuana sales are legal with the price of houses in areas where marijuana sales are not legal, provides one way of determining how the community views the balance of benefits and costs of marijuana sales.

And that is exactly what a new paper by Cheng Cheng, Walter Mayer (both University of Mississippi), and Yanling Mayer (FNC Inc.), published in the journal Economic Inquiry (sorry I don't see an ungated version), does. Overall, I like the approach of evaluating through the effects on house prices. I've blogged before on its use in terms of the effects of radiation following the Fukushima nuclear disaster, sunshine, and proximity to strip clubs.

In this case, Cheng et al. outline the logic for why differences in marijuana regulations would affect house prices:

As home buyers and sellers respond to changes in local amenities and disamenities... the associated benefits and costs of the public programs, such as legalizing retail marijuana, are capitalized into housing values. However, the net effect on housing values is ambiguous ex ante given the opposing effects of the benefits and costs. For example, on the one hand, the benefits of retail marijuana legalization potentially raise housing values by either increasing housing demand (e.g., attracting more home buyers) or decreasing housing supply (e.g., discouraging homeowners from selling their properties and moving). On the other hand, the costs have the opposite effects on demand and supply and, therefore, potentially lower housing values. Thus, this paper estimates the net effect of legalizing retail marijuana on housing values, which reflects the net capitalization of the benefits and costs by the housing market.

They use data from 91,943 house sales in Colorado over the period 2010 to 2015. Over this period, 46 out of 271 municipalities in Colorado chose to adopt legalisation, while the others did not. They find that:

...on average legalizing retail marijuana in Colorado increases housing values by approximately 6%, or $15,600 per property, which can explain about 27% of the overall housing price appreciation in adopting municipalities during the examination period.

Importantly, their results demonstrate that the change in prices occurred right after marijuana was legalised, so it is unlikely that other contemporaneous changes in the housing market or regulatory environment explain the results (especially since different municipalities adopted legalisation at different times).

So it appears that, in Colorado at least, the benefits of legalisation of marijuana sales exceed the costs, because house prices in those areas adopting legalisation moved higher in response to legalisation. However, some caution is warranted before over-interpreting these results. While the benefit-cost evaluation seems to come out in favour of benefits, the size of the change in house prices may not be replicable everywhere. It is notable that Colorado was one of the first two states in the U.S. to adopt legalisation, so to the extent that some people would move to areas where marijuana sales are legal, the demand side of the market has already corrected. States that were later to adopt legalised marijuana would be unlikely to see jumps in house prices to the same extent, because any pent-up demand for living in an area with legalised marijuana sales has already been satisfied.