Impact of Hauraki Gulf Amenity on the Land Price of Neighbourhood Properties An Empirical Hedonic Pricing Method Case Study North Shore, Auckland Auckland Council Working Paper WP2012/001 ISSN 2253-3729 (Print) ISSN 2253-3737 (Online) ISBN 978-1-927169-58-2 (Print) ISBN 978-1-927169-59-9 (PDF) Recommended citation: Rohani, M (2012). Impact of Hauraki Gulf amenity on the land price of neighbourhood properties. An empirical Hedonic Pricing Method case study North Shore, Auckland Auckland Council Working Paper 2012/001 © 2012 Auckland Council This publication is provided strictly subject to Auckland Council’s copyright and other intellectual property rights (if any) in the publication. 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The publication, information, and data contained within it are provided on an "as is" basis. Impact of Hauraki Gulf Amenity on the Land Price of Neighbourhood Properties An Empirical Hedonic Pricing Method Case Study North Shore, Auckland Mehrnaz Rohani Research, Investigations and Monitoring Unit Social and Economic Research Working Paper, March 2012 Abstract The Hauraki Gulf is a coastal feature of the North Island of New Zealand. It has a total area of 4000 km² and lies between the Auckland region, the Hauraki Plains, the Coromandel Peninsula and Great Barrier Island. This case study has evaluated the impacts of the Hauraki Gulf on property land values in the North Shore of Auckland. The study used Hedonic price modelling to quantify the effects of Gulf amenity. Previous studies have focused on the impact of views on property values rather than the impact of beach amenity on property value. Consequently, this study considers both and provides an empirical analysis of the impact of access to the nearest designated beach as well as view amenity for more than 8500 properties, in 12 census area units on the North Shore. Results show that views and amenity of the Hauraki Gulf has significant impact on land prices in the study area. On average, a wide water view could increase the mean land value by 50 percent while locations on the coastline could increase land value by 43 percent, if all the other factors are held constant. If the network distance of a property to access the beach doubled, the land price would decline by 17 percent. This study is the first phase of the investigation into the impact of the Hauraki Gulf amenity on the land price within neighbourhood properties. It is proposed that two other submarkets be included in this study for comparative purposes. Contents 1. Introduction 6 2. Literature 8 2.1 General literature of water amenity 8 2.2 Specific literature of water amenity evaluation in New Zealand 9 3. Study Area 12 4. Methodology and Model Specification 13 5. Data 15 6. Estimation Result and Discussion 17 7. Summary and Conclusion 20 8. References 21 9. Appendices 23 9.1 Appendix 1: Statistical graphs of characteristics 23 9.2 Appendix 2: Median household income sensitivity analysis 25 9.3 Appendix 3: Multicollinearity 26 1. Introduction Environmental protection is one of the principal concerns in the 21 st century. The environment is a public good, meaning it belongs to “everybody” while it belongs to “nobody” exclusively, (Gundimeda, 2006). The costs of protecting the environment can be substantial and also measurable, but there is always a question, how to measure the benefits of protecting the environment. If individuals want to buy a consumer good, for instance a property, the benefit derived from the property will be at least equal to what the individuals are willing to pay for that. So the market price can be used to calculate the individual’s willingness to pay and is indicative of the economic value of the good to that individual. In the case of environmental goods and services, there is no market value. To measure the environmental value some market or nonmarket valuation techniques are required, which can be based on the same principle of an individual’s willingness to pay for environmental derived benefits. (Gundimeda, 2006) A number of techniques are available to value the environmental goods and services. These can be categorised into revealed preference and stated preference techniques. In revealed preference methods, individuals indirectly reveal the willingness to pay for environmental goods through market and surrogate market prices. In stated preferences, the individuals are directly asked what their willingness to pay is. These techniques can be classified according to the method used for valuation ie, market based, surrogate market or non-market based. The Hedonic 1 Price Method (HPM) is a revealed preference method of valuation. The hedonic price method of environmental valuation uses surrogate markets for placing a value on environmental quality. The real estate market is the most commonly used surrogate in hedonic pricing of environmental values because it shows the willingness of the households to pay for a property. Hedonic property models are predicated on the theory that the prices of heterogeneous goods reflect the component values of those goods’ characteristics (Rosen, 1974). Households make their purchase decisions based on a number of structural , environmental and neighbourhood characteristics. Market price as the equilibrium price shows the value of property attributes. The HPM is a tool to separate out the environmental component of value from the observed market price and use that as a surrogate for the environmental value. It is assumed that proximity to the beach and water views are among the most influential factors in a household’s decision to purchase a property in coastal neighbourhood areas. This method has been used extensively in the economics literature to measure the impact of a given resource, such as a beach, river, or lake on the value of locating properties close to the resource. This proximity consists of two separate benefits households derive from living close to the resource, namely access and views. 1 The word “hedonic” comes from a Greek origin, which means, “pleasure”. 6 The objective of this study is to identify and measure these two components that are derived from proximity to the Hauraki Gulf in 12 “census area units”1 on the North Shore of Auckland. While the positive impact of views on Auckland properties have been shown by previous studies (Bourassa et al (2004), Bourassa et al (2005), Samarasinghe and Sharp (2008) and Filippova (2008), this study augments previous research in New Zealand by examining the impact of access distance to the nearest beach, which has not been measured before. Morgan and Hamilton (2011) suggest that using a network distance parameter in the hedonic model is more appropriate to measure the household access to the beach for leisure and recreational purposes, which is different from linear distance to the shoreline. Furthermore, network access varies independently of view, as homes farther from the coast with less view amenity can be closer to access points. Hence, collinearity effects are reduced, and two amenity parameters, access and view, can be separated in the model. Since land value from the unique rate assessment (1 June 2011) is the estimated selling price of the land if vacant as at the effective date of valuation, the land value has been considered as the land market price for more than 8500 single properties. 1 Statistics New Zealand, “Area units are aggregations of meshblocks. They are non-administrative areas that are in between meshblocks and territorial authorities in size. Area units within urban areas normally contain a population of 3,000–5,000, though this can vary due to such things as industrial areas, port areas, and rural areas within the urban area boundaries.” 7 2. Literature The hedonic price model is derived mostly from Lancaster’s (1966) consumer theory and Rosen’s (1974) model. Both of these approaches aimed to impute prices of attributes based on the relationship between the observed prices of products and the number of attributes associated with these products. The Lancaster model presumes that goods are members of a group and that some or all of the goods in that group are consumed in combinations, subject to the consumer’s budget. In comparison, Rosen’s model assumes there is a range of goods, but that consumers typically do not obtain preferred attributes by purchasing a specific combination of goods. Rather, each good is chosen from the spectrum of brands and is consumed separately. The hedonic price approach also does not require joint consumption of goods within a group. Therefore, In the literature the Rosen approach has been followed. 2.1 General Literature of water amenity Numerous studies have examined the aesthetic value of views within the hedonic framework. Some early research captured property views by utilising a single dummy 1 variable. A common shortcoming of earlier studies is that a single dummy classified as view or no view did not distinguish neither different types of view (ocean, lake, mountain, etc.) nor the different scope of view (wide, moderate and slight).