Red light districts and house prices

Following on from Monday's post on legalised marijuana sales and house prices, it is reasonable to consider whether other legal or quasi-legal but controversial activities also have impacts that can be picked up in house prices. A recent working paper by Erasmo Giambona (Syracuse University) and Rafael Ribas (University of Amsterdam) considers the case of red light districts (RLDs) in the Netherlands.

This is a nice paper, and they exploit a change in city policy in 2007 that aimed to reduce the number of red light windows, as well as considering the geography of Amsterdam, where canals provide plausible breaks in the geography that can be used to identify the effects of red light windows, where prices change abruptly. This can be seen in the maps below, where the background colours represent house prices, the black dashed lines are the edges of the two main RLDs in Amsterdam, and the thick blue lines are the canal borders of those districts.

The maps seem to suggest that house prices are higher outside the borders of the RLDs up to 2006 (on the left), but less so from 2007 onwards (on the right). The comparison between the period before the change in red light windows and the period after is important. It means that the analysis isn't confounded by the access of properties to other amenities (that didn't change between the period up to 2006 and the period from 2007 onwards). Indeed, the authors show that the distribution of restaurants, bars, and coffeeshops did not change appreciably between those two time periods.

In their key results for Amsterdam, Giambona and Ribas find that:

...homes next to prostitution windows are sold at a discount as high as 24%, compared to similar properties outside the RLD...

They find similar results using alternative methods, and similar results for Utrecht, where the red light districts were closed entirely in 2013. Specifically, for Utrecht:

 ...we find that households paid up to 1.5% of their property value to be 100 meters further away from the RLDs.

What is the mechanism that underlies the negative impact of red light districts on house prices? Giambona and Ribas find that around half or more of the price difference relates to crime:

To understand the type of nuisance related to prostitution, we also investigate the change in crime rates after the downsizing of RLDs in both cities. In Amsterdam, the crime rate in the RLD declined by 18% relative to other parts of the city. Yet half of the house price discontinuity remains unexplained after controlling for all forms of reported crime and misbehavior. In Utrecht, the crime rate near the RLDs declined by 11%, which represents more than 300 crimes per year. While property crimes and violence can explain up to a third of the price effect in Utrecht, changes in drug-related crimes and minor nuisances explain almost all variation in house prices triggered by the end of the RLDs.

The results are clear - red light districts impose negative externalities on surrounding homeowners, and those externalities can be measured in terms of their effects on house prices. Crime is not the only negative externality that is present (at least for Amsterdam), so presumably red light districts also create other disamenities for their neighbourhood. As recent experience in New Zealand has suggested, for home-based brothels.

[HT: Eric Crampton at Offsetting Behaviour, back in January]