Air Pollution, Housing Prices, and Costs of Sanctions: A Natural Experiment

Abstract

We analyze the causal impact of air pollution on the housing market as the result of a dramatic exogenous increase in air pollution levels in Tehran in 2010 in the aftermath of sanctions imposed on Iran. The sanctions, intended to pressure Iran to end uranium enrichment activities, targeted gasoline imports into the country. In response, Iran rapidly converted some petrochemical plants into refineries to produce gasoline, which was of much lower quality. This caused a quick and drastic increase in air pollution levels that varied significantly across individual neighborhoods. Using this natural experiment and unique administrative data on Tehran’s housing market, we find that a 30 parts-per-billion increase in outdoor concentrations of nitrogen dioxide leads to a decrease in housing prices of approximately 3 percent to 6 percent. We find that lower levels of air pollution are associated with higher price-rent ratios, and higher levels of air pollution raise the odds that owners will rent their property rather than occupy it themselves. Our welfare analysis suggests that the deterioration of air quality in 2010 is associated with a reduction in aggregate housing values of $11 billion to $16 billion in Tehran alone. Also, this paper offers what we believe is a first examination of indirect costs that stem from international sanctions against Iran.