Factors that May Trigger Housing Price Increases
by Petros S. Sivitanides, Ph.D.
Housing price increases in a fully developed residential neighborhood, where housing supply is more or less fixed since there are no vacant lots to allow development of additional housing units, can be caused by increases in demand for that specific location. Since demand for various locations within a metropolitan area is distributed according to the competitive advantages of each location vis a vis other locations, an increase in locational demand can be triggered if a location increases its competitive advantages, or in other terms if a location becomes more desirable compared to other locations. Such improvements can occur through new major development and infrastructure projects that are carried out in the urban area. Within this framework, real estate investors searching for locations with strong potential for development-driven increases in demand for housing, need to consider what kind of developments can make a residential area more attractive to households. Taking into account what studies have shown in terms of the location factors valued by households, we can argue that the following developments can improve the attractiveness of a residential neighborhood and trigger increases in location demand (and housing price increases if there is no excess supply):
a) Considerable improvement of access to jobs and employment centers—such improvement can occur due toconstruction of new subway station in neighborhood, development of large office and industrial parks at short distance from the location under consideration, and completion of new freeway or major transportation artery passing outside but near the borders of the community b) Considerable improvement of neighborhood environment through sidewalk and road improvements, tree planting, landscaping, and street lighting c) Relocation or opening of a good school at a conveniently close location d) Development of shops, services, and/or recreation facilities close enough to provide convenient access to residents, but far enough to spare residents from any nuisance from increased traffic e) Significant upgrading of the level of public services provided (police and fire protection), without significant increases in property tax rates f) Development of a large park or greenbelt very close to the location under consideration
Forces that Trigger Increases in Location Demand for Housing
To understand the value that consumers place on residential amenities and the potential for housing price increases due toimprovements in such amenities, consider that a study conducted in 1995 by American Lives, Inc. reported that 77.7% of the study participants rated natural open space as "essential" or "very important" in planned communities. A number of studies have verified price increases for properties located next or very close to large tracts of open public space. For example, a study by Correll, Lillydahl, and Singell in 1978 estimated that the average value of a property adjacent to the greenbelt would be 32% higher than that of a similar property 3,200 feet away. In addition, a study of the effect of proximity to a park on residential values in Columbus, Ohio, found that homes that faced the park sold at a price 7% to 23% higher than the price at which similar residential properties just one block away were sold (Weicher and Zerbst, 1973). Finally, a study carried out in 2005, by Economic Research Associates, on behalf of the Illinois Association of Park Districts, concluded that neighborhood and community parks can have a significant effect on the values of nearby properties. In particular, based on the review of relevant studies, analysts indicate that homes facing neighborhood parks may register price increases up to a 20%, while homes facing community parks may register price increases up to 33%. Property-value benefits seem to extend 600 feet, in the case of neighborhood parks, and 2,000 feet, in the case of community parks. If we reverse these findings, it can be argued that properties that are nowhere near a greenbelt or a park could appreciatesignificantly if large public open space was developed very close to them. Therefore, the development of a new large park in a relatively densely developed area should contribute to significant price increases for adjacent properties. If the areais not densely developed when the park is constructed, increases in values of adjacent properties may not be very strong. There is little doubt, however, that as the area becomes more densely developed, such properties will register considerably greater price increases than properties that are not in close proximity to the park. In sum, properties in fully developed neighborhoods that are expected to improve significantly in terms of amenities and accessibility to services and the broader urban area should appreciate considerably in value as the developments that will trigger such improvements materialize. However, it is important that these neighborhoods are located in housing markets that are not about to become oversupplied. References Note: This is an excerpt from the book Profitable Real Estate Investing: A Value Growth Approach by Petros S. Sivitanides.
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