Nonlinear Spatial and Temporal Effects of Highway Construction on House Prices
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This paper studies the effect of a newly completed highway extension on home prices in the surrounding area. We analyze non-linearities in both the effect of distance from the highway and the effect of time relative to the completion of the road segment. While previous studies of the effects of nearby amenities on property and land values have focused on either cross-sectional spatial or temporal patterns, the joint analysis of the two dimensions has not been thoroughly investigated. We use home sale data from a period of 11 years centered around the completion of a new highway extension in metropolitan Los Angeles. We combine a standard hedonic model with a spline regression technique to allow for non-linear variations of the effect along the temporal and spatial dimensions. Our empirical results show that the maximum home price appreciation caused by the new highway extension occurs at moderate distances from the highway after it is completed. Lower price increases for this period are observed for homes sold closer to the highway or much further away. This price pattern gradually fades away in the years following the construction completion. A similar, although weaker, price pattern is also observed in the first years of the construction period. There is no statistically significant distance dependency in the 2 years in our sample prior to the beginning of the construction. This indicates that the housing market is not fully efficient as the information about the impending construction of the highway is not immediately incorporated into sales prices.
KeywordsSpatial and temporal dependence Distance effects House prices Spline regression GIS
We are grateful for the helpful comments of the participants of the 2008 American Real Estate Society annual conference. We also thank the Research, Scholarship, and Creative Activities program of the California State University for providing us with the funds necessary to purchase the data used for this study.
We would also like to thank Torto Wheaton Research for sponsoring the prize that the paper won for best paper in the Market Analysis category at the 2008 American Real Estate Society annual conference.
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