Academic journal article The Journal of Real Estate Research

Factors Affecting Housing Modifications and Housing Pricing: A Case Study of Four Residential Neighborhoods in Haifa, Israel

Academic journal article The Journal of Real Estate Research

Factors Affecting Housing Modifications and Housing Pricing: A Case Study of Four Residential Neighborhoods in Haifa, Israel

Article excerpt

Abstract

The relationships among three groups of variables-environmental conditions in residential neighborhoods, post-occupancy housing changes and modifications (HCMs), and the market values of residential properties-are investigated. While traditional hedonic modeling assumes the existence of direct links between environmental factors and property values, this paper suggests that such links are indirect and work through the investment decisions of homeowners, who choose to invest (or not to invest) in the maintenance and/or expansion of their properties. To verify this assumption, HCMs accumulated in four residential neighborhoods in Haifa, Israel are analyzed. The findings indicate a fairly strong association between environmental factors, building characteristics, rehabilitation activity and property values in these neighborhoods. The paper suggests an extra benefit for improving the environment, due to the dynamic process that may cause further investment.

Introduction

Since the pioneering studies of Zangerle (1927) and Henderson (1931) in real estate appraisal, attention to the effects of environmental and building factors (landscape views, vegetation, noise, air pollution, building patterns, etc.) on property values has been unsubsiding (Pennington, Topham and Ward, 1990; Lockwood and Tracy, 1995; Asabere and Huffman, 1995; Feitelson, Kurd and Mudge, 1996; Tomkins, Topham, Twomey and Ward, 1998; Spahr and Sunderman, 1999; Tyrvainen and Miettinen, 2000; Johnston, Swallow and Bauer, 2002; and Grudnitski, 2003.1

The ongoing interest to this issue is mainly due to a sizable contribution the property taxation makes to the financial base of local authorities, and the presence of numerous players acting on the property market and affected by it, both directly and indirectly, namely construction companies, planning organizations, mortgage banks and private investors (Appraisal Institute, 1992; Delisle, Sa-Aadu and Graaskamp, 1994; and Yermiyahu, 1999).

In most empirical studies, the Hedonic Price Model (HPM) is used to identify and measure the effect of environmental valuables and building characteristics on property values. This modeling approach assumes that the monetary value of a dwelling unit depends on the attributes a particular house or apartment may possess. For instance, the market price of a dwelling may reflect its physical size and environmental characteristics, such as the number of rooms, age, location, etc. (Becker and Lavee, 1999; Des Rosiers, 2002; and Plaut and Plaut, 2003).

Although the hedonic price method is, undoubtedly, the most commonly used research tool for investigating the negative and positive effects of neighborhood amenities and building characteristics on property values, some underlying assumptions of this method may, nevertheless, be questioned. For instance, the hedonic price approach assumes the existence of direct links between environmental factors and building characteristics, on the one hand, and property values, on the other. However, these factors likely correlate indirectly, through the investment decisions of property owners.

Thus, according to the research hypothesis posited here, this link works as follows. Environmental amenities in a residential neighborhood (proximity to open areas, attractive views, etc.) encourage homeowners to invest more in the physical expansion and maintenance of their properties-in building additions, modifications, renovations, gardening, etc. As a result, with the passage of time, the neighborhood appearance improves overall, and the property prices remain high. In contrast, if the environmental conditions in the neighborhood are unappealing (e.g., a neighborhood is situated on low elevations, deprived of green views, open spaces, surrounded by noisy roads or incorporates other environmental disamenities, either existing from the outset or added later), the local homeowners may see little value in investing in the maintenance of their properties, assuming that such investment is unlikely to pay off in the future. …

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