The impact of gated Communities on property values: evidence of changes in real estate markets -Los Angeles, 1980-2000

Abstract

The paper focuses on how gated communities, as private means of providing public infrastructure and security, real estate products and club-economies, produce changes in housing market patterns. Based on an empirical study of Los Angeles (California) data, it aims to trace to what extent gates and walls favor property values and if the presence of gated communities produces over time (1980-2000) a deterrent effect on non-gated properties abutting the enclave, or close to it.Resulting from a demand for security, gated communities are a leading offer from the homebuilding industry. But their spread emerges from a partnership between local governments and land developers. Both agree to charge the homebuyer with the cost of urban sprawl (construction and maintenance costs of infrastructure within the gates). Such a structuring of residential space is particularly desirable on the urban edges, where the cost of urban sprawl exceeds the financial assets of local public authorities. New private developments provide local governments with new wealthy taxpayers at almost no cost. As compensation, the homebuyer is granted private and exclusive access to sites and amenities (lakes, beaches, etc.). Such exclusivity favors the location rent, and usually positively affects the property values within the gated enclaves.But it is also assumed that operating cost of private governance are paid for by the increase of property values. Market failure nevertheless occurs when costs rise above sustainable levels compared to property values.Changes produced by gates yield to at least two outcomes. At first sight, residential enclosures produce a price premium, thus being a smart investment. Furthermore, gated communities might well be able to generate enough property value to pay off the price of private governance. But this analysis holds only on a short-term basis. In the long term, larger and wealthier gated communities are successful in shielding their property values and generate enough revenue to pay the cost of private governance, whereas a majority of average middle class gated enclaves do not succeed in creating a significant price premium, and / or did not maintain significant price growth during the last decade. Such gated neighborhoods are at risk of a market failure in the private provision of urban infrastructure, leading to potential decay.