Externalities of Urban Renewal: A Real Option Perspective

If carefully planned, urban renewal may play an important role in regenerating a decaying neighborhood and mitigating the negative externality generated by dilapidated buildings in densely populated areas. Despite its potential benefits, in urban areas dominated by high-rise developments, urban renewal has an unintended negative impact on nearby properties since it reduces their redevelopment option values. In this study, we develop a number of hypotheses on how an urban renewal project, once made known to the public, affects neighborhood housing prices and test them with data in Hong Kong. Our empirical findings suggest that the degree of positive externalities brought by urban renewal depends on the scale of an urban renewal project, as well as the amount of commercial areas included in the project. Most importantly, through examining changes in the age coefficient, we found that an urban renewal project reduces the value of nearby buildings beyond the boundaries of the project. The negative effect was stronger for older buildings and for those buildings located closer to the project’s boundaries. These unintended consequences of urban renewal have not been analyzed or tested in previous studies.postprin

How do people price air quality: empirical evidence from Hong Kong

We investigate how air pollution affects the transaction prices of high-rise apartments in Hong Kong. We use a three-dimensional Reynolds-stress turbulence model to simulate the air pollution level of each unit in high-rise apartment buildings in a densely populated area in Hong Kong (Study Area). We then verify the simulated results with site measurement data. Although the area is small, the variety of building forms and location of streets resulted in significant variation in air quality across apartment units. The apartments in the Study Area are actively traded and relatively homogenous. We estimate the implicit price by constructing a hedonic price model that includes the simulated apartment specific air pollution level as one of the explanatory variables. We find that the apartment prices are more sensitive to air quality in more polluted areas.published_or_final_versio

The significance and performance of the emerging property markets in Asia

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The value of the provision of a balcony in apartments in Hong Kong

In Hong Kong, a balcony is often perceived as a “green” provision in modern residential buildings. However, how the market values the benefits of balconies is seldom studied due to the difficulty in separating such benefits from other associated effects such as view enjoyment and security concerns. This paper attempts to study the implicit value of a balcony, the green effects of balconies on the prices of residential properties, and the effect of security concerns on balconies situated on lower floors. A sample of transactions in a private housing estate in Hong Kong has been studied. The sample contains apartments with and without balconies. A balcony is found to have a positive effect on the value of a property irrespective of the quality of the view. The negative effects of air and noise pollution on property prices are also found to be highly significant. Although security concerns are found on the low stories of a building, the provision of a balcony does not aggravate the hazard. Finally, the log-linearity assumption in the empirical price model is relaxed by applying the Box-Cox transformation to the continuous variables.published_or_final_versio

The significance and performance of infrastructure in China

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Adjusting for non-linear age effects in the repeat sales index

A true constant quality real estate price index should measure the general change in price level free from any change in quality over time. In recent years, the repeat-sales method has been widely used to construct constant quality property price indices. Since buildings depreciate over time, a simple repeat-sales index would underestimate the growth in property prices. The major problem of controlling the effects of age constant in a repeat-sales model arises from the exact multicollinearity between the age variable and the time dummy variables. In this study, we derive a solution that is theoretically sound and practical by allowing the age effects to be non-linear. In case of leasehold properties, we further incorporated interest rates into the model because the effects of age on real estate prices depend theoretically on interest rates. A sample of residential units in Hong Kong sold more than once from Quarter 2 of 1991 to Quarter 1 of 2001 (more than 11,000 repeat sales pairs) are used for the empirical analysis. © 2005 Springer Science + Business Media, Inc.postprintInaugural Singapore/Kong Hong International Real Estate Research Symposium, Singapore, 18-19 July, 2003. In Journal of Real Estate Finance and Economics, 2005, v. 31 n. 2, p. 137-15

Trading volume-induced spatial autocorrelation in real estate prices

This journal issue is the Special issue: Asia-Pacific Real Estate Research Symposium 2010Spatial dependence is often seen as a problem in econometrics rather than in economics. This study seeks to find an economic explanation for spatially correlated real estate prices. We posit spatial dependence as a process to discover price information from neighboring property transactions. Weaker spatial dependence is expected when price information in the immediate vicinity of a subject property is abundant. In the context of apartment buildings, in addition to the more commonly known horizontal dependence, there is also spatial dependence in the vertical dimension within the same building. Based on more than 18,000 transactions of highly homogeneous apartment units in Hong Kong, we found that the trading volume of a building depresses horizontal spatial dependence, but raises vertical spatial dependence. This not only confirmed the role of trading volume in the real estate price discovery process, but also questioned the validity of constant spatial autocorrelation assumption adopted in many studies. © 2012 The Author(s).published_or_final_versio

Property price gradients: The vertical dimension

This is an empirical study on the pricing of two vertical property attributes: floor level and building height. Floor level is the vertical location of a unit in a multi-storey building; the extra price paid for a higher floor level is labelled a floor-level premium. Previous hedonic price studies unequivocally showed that the floor-level premium is positive, but they were silent on whether its magnitude varies with floor levels and with buildings of different heights. Indeed, building height is a feature of a building, not its constituent units, so it is not clear whether building height alone should affect the units' prices. Based on a sample of highly homogeneous housing units in buildings of varying heights, we found that (1) the floor-level premium was not constant, but diminished as floor level increases; (2) there was no significant difference in the pattern of the floor-level premium between high-rise and low-rise buildings; and (3) there was a positive and significant premium for units in low-rise buildings over those in high-rise ones. These findings can help developers determine the optimal height and shape of their development. © 2010 The Author(s).published_or_final_versionSpringer Open Choice, 21 Feb 201

Separating the age effect from a repeat sales index: land and structure decomposition

Since real estate is heterogeneous and infrequently traded, the repeat sales model has become a popular method to estimate a real estate price index. However, the model fails to adjust for depreciation, as age and time between sales have an exact linear relationship. This paper proposes a new method to estimate an age-adjusted repeat sales index by decomposing property value into land and structure components. As depreciation is more relevant to the structure than land, the property’s depreciation rate should depend on the relative size of land and structure. The larger the land component, the lower is the depreciation rate of the property. Based on housing transactions data from Hong Kong and Tokyo, we find that Hong Kong has a higher depreciation rate (assuming a fixed structure-to-property value ratio), while the resulting age adjustment is larger in Tokyo because its structure component has grown larger from the first to second sales.postprin

Floor-level premiums in high-rise and low-rise buildings

This paper examines a unique feature of multi-storey buildings – floor-level premiums. Floor-level premiums refer to the price paid for the vertical location of a flat, measured by its floor level. Previous hedonic price studies unequivocally showed that floor-level premiums are positive. However, they were often based on the assumptions that floorlevel premiums are constant 1) across different floor levels within the same building and/or 2) across different buildings given the same floor level. This second assumption is particularly interesting because it begs the question of whether the same premium is paid for high-rise and low-rise buildings. For instance, do we pay the same for the 5th floor of a low-rise building and that of a high-rise building? Based on a sample of highly homogeneous buildings (except for their heights), we found that floor-level premiums were not constant but diminishing with respect to floor levels. Moreover, there was no significant difference in the pattern of floor-level premiums between high-rise and lowrise buildings. Finally, there was a positive and significant premium for shorter buildings over taller buildings.published_or_final_versio