«J Real Estate Finan Econ (2006) 33: 91–103 DOI 10.1007/s11146-006-8943-4 The Announcement Effect of an Airport Expansion on Housing Prices G. ...»
J Real Estate Finan Econ (2006) 33: 91–103
The Announcement Effect of an Airport Expansion
on Housing Prices
G. Donald Jud & Daniel T. Winkler
# Springer Science + Business Media, LLC 2006
The purpose of this study is to examine the influence of the announcement of a new airport hub on housing prices near the airport. While numerous
studies of airport noise have found that high noise levels reduce property values,
few have been able to measure the announcement effect on values. The results indicate that after controlling to extraneous influences, housing property prices in a
2.5 mile band from the Greensboro/High Point/Winston Salem metropolitan airport declined approximately 9.2% in the post-announcement period. In the next 1.5-mile band, house prices declined approximately 5.7% in the post-announcement period.
Keywords Airport noise. Aircraft noise. Property values. Housing prices.
Residential property Introduction Local economic development groups often look to improved air service as a way to quicken the pace of economic growth in their communities. This is especially true in areas where the pace of growth is perceived to be lagging. The Greensboro/High Point/Winston-Salem MSA (the Triad) is an eight-county area of central North Carolina that includes the cities of Greensboro, High Point, and Winston-Salem.
The economy of the region has long been concentrated in apparel, furniture, textile, and tobacco manufacture. But by the mid-1990s, regional growth had begun to lag G. D. Jud (*) : D. T. Winkler Bryan School of Business & Economics, University of North Carolina—Greensboro, P.O. Box 26165( Greensboro, NC 27402-6165, USA e-mail: email@example.com D. T. Winkler e-mail: firstname.lastname@example.org 92 G. Jud, D. Winkler both state and national averages as the region’s major industries faced stiffening international competition.
Local economic development groups sought a FedEx hub as a way to stimulate the region’s economic growth. The new hub offered significant economic development benefits to the region. It was anticipated to initially employ 750 people, 250 full-time with an average salary of $34,000, and a longer-term goal of employing 1,500 people.
In addition, the hub would bring state tax incentives for infrastructure improvements, and also attract additional businesses related to FedEx.
In April 1998, it was announced that Federal Express had decided to locate a regional air-cargo hub at the Piedmont-Triad International Airport (PTI). The hub would require an expansion of the current airport infrastructure by adding a third runway to the current airport. Newspaper reports at the time anticipated that the hub would begin operation in May 2004, with about 20 flights a night scheduled for landing and takeoff between 10 P.M. and 4:00 A.M. The number of flights was expected to expand to 126 per night by 2009.
Following the initial announcement, a widely reported public debate erupted between proponents who stressed the anticipated economic benefits on area employment and income and opponents who warned of the effects on noise, pollution, and congestion. A search using the InfoTrac database revealed a total of 508 news stories and 582 opinion and editorial pieces in the Greensboro News & Record relating to the FedEx hub between January 1998 and June 2004.1 This paper examines the effect of the FedEx announcement on surrounding property values.2 The first section reviews the literature on airport noise and property values. The second and third sections present the methodology and empirical model, respectively. The fourth section lays out the data and empirical results, and the final section reviews relevant findings.
For the first several months, the news stories in the News & Record reported that six metropolitan airports were being considered for the FedEx hub. The final announcement that FedEx had chosen PTI occurred on April 13, 1998. In July 1998, the governor signed into law a multi-million dollar incentive package that included millions of dollars of tax breaks for FedEx. The first draft of the FAA environmental impact statement was released on April 6, 2000, which supported the FedEx proposal. In June 2000, the Environmental Protection Agency expressed a concern that the noise level estimates were underestimated, and state environmental regulators were concerned about damage to wetlands and wildlife habitats. During the months leading to the elections, opponents of the FedEx hub openly campaigned against politicians who supported FedEx; some politicians changed their position and some others lost the election because of their support for the hub. In November 2001, the FAA released its final impact study selecting the PTI hub as the preferred alternative of six options, and formally approved the project. However, delays in the approval process resulted in the target date for an operational hub being postponed until 2009; clearing and leveling of land began in 2004 with the expectation this phase being completed in early 2007.
It is important to note that what we refer to as an announcement effect is actually a series of announcements that extends over multiple years (but well before the operation of the airport expansion).
These announcements provide information to housing market participants who act on this information, resulting in adjustments to housing prices.
The Announcement Effect of an Airport Expansion on Housing Prices 93
The relationship between airport noise and property prices has been examined for a number of cities in North America and Europe.3 The results of many of the early studies have been summarized by Nelson (1980). All of the studies estimate hedonic price equations for residential property in which the level of noise is included among the attributes of the properties examined.
In order to compare the results of the studies, Nelson develops a Noise Depreciation Index (NDI), which measures the percentage decline in the price of housing for each unit increase in noise exposure. Nelson finds that the NDI averages 0.58 for the 18 airport studies he examines, that is, residential property values fall 0.58% for every decibel increase in airport noise.
More recent studies by Pennington, Topham, and Ward (1990) and Collins and Evans (1994) examine the relationship between noise and property values in Manchester, England. Pennington, Topham, Ward report no relationship between housing values and noise in Manchester during 1985–1986. Collins and Evans (1994) reexamine the Manchester data employed by Pennington, Topham, and Ward using a neural networks approach. They report that noise indeed does exert a strong, independent effect on residential values, which is negative. The effect of airport noise in the Manchester area has further been examined by Tomkins, Topham, Twomey, and Ward (1998) using 1992–1993 data. They estimate the noise discount at 0.84% per decibel.
Uyeno, Hamilton, and Briggs (1993) report a NDI of 0.68 using data for the Vancouver area in 1987. A unique feature of the Uyenro, Hamilton, and Briggs paper is the results reported for vacant land. They find the NDI is significantly higher for vacant land than for detached housing. Levesque (1994) explores the impact of noise in the area surrounding the Winnipeg airport during 1985–1986. He decomposes the effects of noise into two separate aspects: intensity and frequency.
He reports that frequency is less important than loudness and the variability of the loudness during a single occurrence.
Other studies by Espey and Lopez (2000), Feitelson, Hurd, and Mudge (1996), and O’Byrne, Nelson, and Seneca (1985) explore the impact of airport noise in other metro areas, including Atlanta and the Reno-Tahoe area. While the studies employ different measures of airport noise, each reports significant noise discounts.
However, Lipscomb (2003) finds that the change in noise level causes a negative but statistically insignificant change in the housing sales price for a small city located near Atlanta GA; the relatively small sample size might partially explain the insignificant noise effect.
McMillen (2004) estimates the noise discount applying to properties around Chicago’s O’Hare airport. He measures noise using the annual energy mean sound level (Ldn), which has become the most common measure of noise for North
American airports. The Ldn statistic measures average sound levels over the course of a year, including a 10 dB penalty for nighttime. The FAA and HUD define areas exposed to Ldn levels of 65 or over as incompatible with residential housing.
McMillen reports a 9.2% discount on homes selling in severe noise areas where Ldn levels are 65 or above.
Nelson (2004) conducts a meta-analysis of airport noise and property values. The study consists of 33 estimates of noise discount for 23 airports in Canada and the U.S., combining the findings of various prior studies. His results indicate that the noise discount is between 0.50 and 0.60 per decibel (dB). Properties would sell at about 10–12% less if located at 75 dB instead of 55 dB.4 Salvi (2003) applies a hedonic regression specified as a spatial error component model for single family housing data in the Zurich Switzerland airport area. He finds that airport noise decreases housing values by up to 4% for noise levels of 55 dB and under, and up to 27% for noise level of about 68 dB. Although spatial autocorrelation is found to exists, its effect on the estimated coefficients and their standard errors is minimal.
An Ex-ante versus Ex-post Housing Price Methodology
Our study differs from most prior research because if focuses on the announcement effect on property values of an airport expansion to accommodate an air cargo hub.
We measure the change in the property values pre- and post-announcement of the airport expansion, but before the actual construction or operational use of the new airport facility.5 A potential problem with almost all airport noise studies is that they examine the effects of noise in an ex post dimension, that is, after the noise level has increased and property markets have had time to adjust. The problem with this approach is that after the fact, noise is very highly correlated with other aspects of the property market: air pollution, traffic congestion, and other neighborhood/location amenities.
This is the point made by Pennington, Topham, and Ward in explanation of their insignificant findings for the Manchester area. They suggest that noise is inextricably bound up with other, more important neighborhood/location variables so that its effect cannot be reliably untangled using property data collected after the noise level has changed.
The impact of noise on property values is non-linear; the audible irritation to humans from noise, as measured per decibel (dB),) is greater per dB increase at higher levels of noise than per dB increase at lower levels of noise. Theebe (2004) analyzed 160,000 transactions in the Western part of The Netherlands, and found very little impact of noise below 65 dB from trains, vehicular traffic, and airplanes on property values. However, the estimates were relatively large between 66 and 75 dB, especially for more expensive properties.
During the period of study, the airport expansion was announced and studies of the environmental impact were conducted during the approval process. However, the actual airport expansion had not begun.
The Announcement Effect of an Airport Expansion on Housing Prices 95 To overcome this problem, we propose an event study methodology.6 Using this approach, we are able ex ante to study effects of the noise announcement. Because the announcement of a change in noise (both frequency and intensity) does not change the actual noise level, we are unable to directly examine the effect of a change in noise. Instead, we assume that the expectation of future noise brought about by the announcement is related to distance from the airport.7 Thus, the announcement of a significant change in airport traffic (and noise) will affect the shape of value-distance gradient for properties surrounding the airport.8
To examine the effect of the FedEx announcement on the value of surrounding residential property, we posit the following hedonic price model for property i at
ln Pi;t ¼ a0 þ a1 Ti;t þ a2 Di;t þ a3 Ai;t þ a4 Ci;t þ ui;t ð1Þ where ln Pi,t log of the real sales price (sales price adjusted by the consumer price index CPI-U), Ti,t time of sale, Di,t a vector of distance bands, Ai,t a vector of housing property characteristics, Ci,t vector of city location variables, ui,t a stochastic error term.
The concept of event study methodology was coined in the finance literature as a method used to study the impact of new information (usually from an announcement) on stock prices. The methodology developed by Fama, Fisher, Jensen, and Roll (1969) used the market model in a pre-announcement period to estimate the regression parameters. In the subsequent announcement period, these parameters were used to provide regression residuals. A cumulative change in residuals indicated a significant announcement effect. Work by Brown and Warner (1980, 1985) tested variations of event study methodology. Karafiath (1988) demonstrates that the use of dummy variables for the days of the announcement period provides identical results to the use of the regression residuals. Burnett, Carroll, and Thistle (1995) offer a general methodology to correct for changes in market parameters.
The final Record of Decision by the FAA was issued on 12-31-01. The noise impact estimates were provided in the report. A total of 178 people and 75 homes would be within the DNL 65 dBA noise contour without the expansion. With the expansion, 698 people and 262 homes would be within the contour. Of these, 126 people and 53 homes would be inside the 70dBA contour. Also, 549 people and 231 homes (of the 628 people and 262 homes) would experience an increase of DNL 1.5 dBA within the DNL 65 dBA (BThreshold of Significance’’ for noise impacts). This information does not necessarily coincide with the distance bands used in this study, so it is not possible to meaningfully equate the dBA information to the findings our study. In addition, there have been revisions to the dBA impact and the contours since the report was issued.