Introduction to Feature: The Price of Access to Better Neighbourhoods

Abstract

Paul Cheshire and Stephen SheppardSeeing a Feature concerned with house prices in this Journal would probably leadmost economists to expect a set of papers focusing on houses as financial assetsand the impact of house prices on consumption behaviour; or they might expectto find a real estate economics feature analysing what particular aspects of a housereally influence its price. At one level this Feature is concerned with all theseissues, although perhaps rather more with what contributes to the price of a housethan to the more financial and macroeconomic issues. Collectively we think thesepapers support a much more ambitious claim, however: they show how the con-sumption of a wide range of local public goods and amenities normally thought ofas being independent of income is in fact conditioned on household income inmuch the same way as is the consumption of normal private market goods.Moreover this process provides an important insight into the extent and incidenceof social segregation in cities and into how this essentially articulates spatially theoverall distribution of incomes in society.Certainly all three articles are concerned with house prices. Viewed in this waythe papers collectively add important insights to our understanding of the deter-minants of house prices and how rapidly housing markets adjust to shocks. Theresults presented in Clapp and Ross (2004) strongly suggest house prices adjustrapidly to exogenous changes in demand. This is reassuring in the context of thetwo other papers since the methodology of both implicitly assumes that there isequilibrium in housing markets. Similarly the paper by Cheshire and Sheppard(2004), shows how nonlinear the price functions are with respect to the attributesof houses. It is only the very few best schools that generate substantial priceimpacts; but in the case of the best schools the price premia they command can bereally very substantial indeed. Similarly the paper by Gibbons (2004) providesvaluable evidence on the impact of local crime rates on house prices as the authorskilfully devises a methodology to avoid the pitfalls while being parsimonious withhis demands on data. He shows that price discounts arise from visible neigh-bourhood crime and social disorder rather than burglary – an invisible crime butone that is more obviously harmful.We argue however that together these papers support a more ambitious claim.House prices are about much more fundamental economic and social issues thandinner party conversations or estate agents’ talk would credit. The way in which the