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Land Supply, House Price Capitalization, and Local Spending on Schools

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  • Christian A. L. Hilber
  • Christopher J. Mayer

Abstract

Many researchers have noted that house prices reflect the capitalized value of local public services and amenities on house prices, but few empirical papers link the extent of house price capitalization to local spending decisions. In this paper we show that the causality indeed runs in both directions; in particular, local spending is higher in places with a greater degree of capitalization. To begin we make a simple observation; the degree to which house prices capitalize local amenities can vary substantially depending on the supply of land for new housing. In response to demand shocks, locations with more available land will have a larger adjustment in quantity, but a smaller adjustment in price and vice versa. We examine these predictions using a unique data set for Massachusetts that includes a measure of available land that varies by community and takes advantage of a property tax limit (Proposition 2½) that provides instruments for local changes in spending. Indeed, we find that fiscal variables and amenities are capitalized to a much greater extent in cities and towns with little available land, and confirm that these locations have a lower elasticity of land supply. We then show that localities with little available land spend more on schools, even after controlling for other factors that might affect demand for education. These results provide an alternative explanation for why suburban locations with little available land have relatively high spending on local schools.

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Paper provided by Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania in its series Zell/Lurie Center Working Papers with number 392.

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Handle: RePEc:wop:pennzl:392

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Cited by:
  1. David Brasington & Donald R. Haurin, 2006. "Educational Outcomes and House Values: A Test of the value added Approach," Journal of Regional Science, Wiley Blackwell, vol. 46(2), pages 245-268.
  2. World Bank, 2006. "Urban Land and Housing Markets in the Punjab, Pakistan," World Bank Other Operational Studies 8280, The World Bank.
  3. Abbigail Chiodo & Rubén Hernández-Murillo & Michael T. Owyang, 2005. "Nonlinear hedonics and the search for school district quality," Working Papers 2003-039, Federal Reserve Bank of St. Louis.
  4. Hansjörg Blöchliger & José Maria Pinero Campos, 2011. "Tax Competition Between Sub-Central Governments," OECD Economics Department Working Papers 872, OECD Publishing.
  5. Velma Zahirovic-Herbert & Geoffrey Turnbull, 2008. "School Quality, House Prices and Liquidity," The Journal of Real Estate Finance and Economics, Springer, vol. 37(2), pages 113-130, August.
  6. Paul Cheshire & Stephen Sheppard, 2003. "Capitalising the Value of Free Schools: The Impact of Supply Constraints and Uncertainty," ERSA conference papers ersa03p8, European Regional Science Association.

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