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January 27, 2013

What price a top state school? The best things in life may be free, but buying a house in the vicinity of the best things in life is expensive

Tim Harford:

How much do parents value a safe environment, green spaces and a good education for their children? Such things are priceless - except that, of course, they are not. The best things in life may be free, but buying a house in the vicinity of the best things in life is expensive.

Economic researchers use house prices like a movie jewel-thief uses an aerosol spray. The aerosol isn't important by itself, but it reveals the otherwise invisible laser beams that will trigger the alarm. The house prices aren't necessarily of much direct interest, but indirectly they reveal our willingness to pay for anything from a neighbourhood free of known sex offenders to the more familiar example of a popular school.

In principle this is easy. Compare the market price of two otherwise identical houses, one of which enjoys the amenity in question (a nice view, a quiet street, access to an excellent school) while the other does not. In practice, houses are rarely identical, and all sorts of valuable amenities from good schools to good neighbours to low crime are likely to be jumbled up together.

Posted by Jim Zellmer at January 27, 2013 4:51 AM
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Then professor, now senator Elizabeth Warren authored The Two-Income Trap, which details much more specifically the willingness of Americans to pay a premium for homes in good neighborhoods with good schools.

The data and the book is mid-2000s and was pre-mortgage, housing, and bank collapse so it could use some updating with this reality in mind. Nonetheless, the data from the period she studied showed significant effects of school, safety, and neighborhood on the increase in housing prices and the willingness of parents to incur increased debt to give their children access to better schools.

This research also argued against some prominent opinions that people were spending extravagantly on homes, buying McMansions, and overextending debt for the sake of property investments, short term financial gain, and quick rollover. Such certainly did occur as bank fraud created the housing bubble later in the 2000's, but prior data did not show this trend.

Posted by: Larry Winkler at January 27, 2013 4:22 PM
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