Effects of air quality on house prices: evidence from China’s Huai River Policy

Abstract

We employ a regression discontinuity (RD) design to estimate the impact of air pollution on house prices across a river that demarcates regions with and without coal-fired heating resulting from the Huai River Policy. This policy was decreed by the Chinese government in the 1950s and mandated the burning of coal for indoor heating at subsidised prices north of the Huai River. Employing quasi-experimental variation in particulate matter of 10 micrometres or less in aerodynamic diameter (PM10) generated by this arbitrary policy and a regression discontinuity (RD) design based on distance from Huai River, we estimate the local average treatment effect (LATE) to provide new evidence on the capitalisation of PM10 air pollution into house values. By using panel data covering 30 large cities on either side of the river for the period 2006–2015, we found that 1 µg/m3 (micrograms per cubic metre) reduction in average PM10 is associated with an approximately 1% increase in house prices. The results are robust to using parametric and nonparametric estimation methods, adjustment to a rich set of covariates, and using a subsample excluding first-tier cities.