Evaluation of stigmatized properties

One of the reasons for real estate value decreases, again a combined effect of several factors, is the proximity of airports. In 1994, a summary overview of previous related studies was made by the Federal Aviation Administration of the United States, and based on this survey, a recommendation for a new methodology was made. The purpose of the study was to enable decision-makers to assess, before building new airports, the expectable additional costs arising due to the value impairment affecting property owners due to increased noise levels. For this purpose, a mixed data collection and evaluation method was developed. The study highlights the fact that the value impairment of low-prestige properties is of a significantly lower percentage than that of high-prestige properties. It was raised as an open question that a possible later decrease in noise levels around airports does not necessarily entail increasing prices. No other (published) research has been conducted on this matter ever since. Later on, several (mostly American) experts have researched the value-impairing impacts of airports, always relying on the conclusions of their predecessors. Besides summarizing previous experience, Bell (2001) points out that property renters are less sensitive to increasing noise than property owners, and thus rental fees change to a lesser extent than the market value, which is related to the criteria of property owners.

Nelson (2004) studied 33 previous data aggregations in his article, using a meta-regression model. He found that, in the area of the US, a 0.6–1.5 dB increase in noise levels entails a value impairment of 1%. On the other hand, he pointed out that none of the previous studies could handle the elimination of value-enhancing impacts of airports, e.g. improved accessibility. This factor is also dependent on distance, and, unlike negative effects, it definitely increases property values. In another paper, published 4 years later (Nelson 2008), he described the modelling procedures for this problem and the related study findings. He arranged potential methods into two clear-cut groups: hedonic pricing (HP) and stated preference (SP). Lazic and Golaszewski (2006) made an overview of significant analyses that had been made in the US since 1990 and summarized them for the purpose of synthesis. They found that both the methods applied by analysts led to the general conclusion that each 1 dB increase in noise load entails, on average, about 1% of property value impairment. Jud and Winkler (2006) applied a new approach compared to previous studies: they studied how the news of the announcement of building a new airport would affect housing prices. By applying the Spatial Auto Regression (SAR) model on a sample size of tens of thousands, they found that the announcement led to a 9.2% decrease within a 2.5-mile area of the airport and to a 5.7% decrease in a further 1.5-mile area, instead of the usual ~2% discount in the asking prices. However, despite the massively unequivocal standpoint of researchers (1 dB noise – 1% value impairment) and their multiple syntheses, results with the opposite outcome appear as well. In his thesis, Valdes (2008) used a method of spatial correlation and did not find any obvious value impairment in connection with the increase of noise levels at Oakland Airport. Valdes points out that, at certain locations and for certain types of properties, a change in the items that constitute value might even lead to an increase in value with regard to an airport. Boes and Nüesch (2011) share a similar opinion when they find that rental fees are not influenced solely by the actual magnitude of noise but also by other, often counteracting, variables that are related to a certain location. They also found that, in the area around Zurich Airport, a 1 dB increase in noise levels led to a 0.5% decrease in rental fees. Hajnal (2017) conducted a study of Budapest Airport and concluded that, based on the examination of a hedonic model, the extreme 25% value impairment that is commonly assumed is not justified by the sample. Even if such an impact exists at all in this environment, it is to a much lesser extent than commonly thought.

The greatest encumbrance caused by airports is noise, but the effects of noise on property value have been covered by international literature on its own, independent of airports. After a thorough review of previous publications about road and railway noise, Bateman et al. (2001) write that authors have demonstrated between 0.08% and 2.22% of value impairment per decibel, with an average reduction of 0.55%. This is less than the average of 1% relating to airports. A 2010 study in Hamburg based on price offers demonstrated even less, an average of 0.23% depreciation per 1 dB increase in road noise (Brandt and Maennig 2010). A year later, the same authors also investigated the effects of railway transportation in Hamburg, and their final results showed that railway accessibility as a positive external factor dwarfed any negative environmental effects due to railway proximity (Brandt and Maennig 2011). It should be noted that this effect is by a different order of magnitude: the railway station’s proximity increases property value by 4.6% (in Hamburg, in 2012). Furthermore, using a similar method, the effect of the new London Jubilee Line was estimated to increase property value by about 9.3% (Gibbons and Machin 2005). At this point, too, it is worth pointing out the internal shortcomings of the Hedonic method: no amount of care in model construction allows separating the negative from the positive effects on property value of the same cause (e.g. railway construction).

Andersson et al. (2010) published a case study comparing road and railway transportation noise effects in Sweden. They concluded that road noise has a larger negative effect on housing prices than the same amount of railway noise (Andersson et al. 2010). Again, the question arises regarding the reasons and whether the indicator used in the analysis is good enough. It is not only a question of using the right calculations and benchmarks for scientific analysis but also whether the measured numbers provide an accurate representation of the subjective perceptions of noise pollution. Baranzini et al. (2008) reached the conclusion that in these cases, his hedonic model returned similar results based on both subjective and objective values when noise pollution was medium or high.

One of the most dangerous environmental hazards is air pollution, which has made the lives of entire metropolises more difficult. It is no coincidence that stigma due to air pollution is a major area of research in environmental literature. Depreciation of real estate has become the focal point in certain areas of environmental protection in some countries. Because of the air pollution factor, this situation has become a cornerstone of national regulation in the US. In counties where air pollution (or more precisely, the total number of suspended particles) reaches a certain upper limit, any kind of emission has been under much stricter regulation since 1977 than in other places. According to Chan and Chin (2002), as a result of strict regulation, the combined value of flats in affected areas rose by $45 billion, because according to their hedonic analysis, a 1 μg/m³ decrease in suspended particles yielded an average increase of 0.28% in property values. However, their method has been under attack from multiple flanks, including methodological ones since the 1970s (see e.g. Harrison and Rubinfeld 1978). In spite of that, researchers continue using the hedonic method when estimating the effect of air pollution on market values for a metropolis or a country (Carriazo-Osorio 1998). There have been many micro-studies in the field; an example is an investigation of how the stench from Californian auto body shops impairs value, according to which depreciation is at 3.4% (Saphores and Ismael 2005), or the stigmatizing effects of the smell from Brazilian wastewater treatment plants; accordingly, stench does cause a significant decrease in value (Batalhone et al. 2002).

A previous article (Moffatt et al. 2001) draws attention to the fact that while in Victorian England, a mill’s smoking chimneys meant work availability and welfare, and thus the locals judged the site favourably, today, society’s expectations of air quality turns the same (or, by today, a significantly lower) effect into a negative one. Moffat et al.’s case study is one of the few that does not apply the HP method when analyzing stigmatized property but rather uses the SP model. The conclusion is also noteworthy. While outsiders view the industrial area designated in the case study as stigmatized and heavily polluted, the inhabitants themselves do not feel that way. This conclusion appears in other publications on air pollution as well; those living in the broader area deem air pollution to be greater, and those living in the immediate area deem it to be less than in reality (Bickerstaff and Walker 2001; Bickerstaff 2004).

There is ample literature on the effects of a panoramic view, but the results are rather contradictory. Magill and Schwan (1989) were the first to conduct a systematic study of this question in 1989. They focussed primarily on the effect of landscape views on price during their 7 years of research. After investigating large areas, they classified possible panoramas by distance, span and perspective. The grand total of 66 variables applied to the dataset of 236 studies spread over 13 sample areas prove to be too many and too complex to allow a hedonic method to yield evaluable and generalizable results. The authors – as landscape experts – finally concluded that their point of view and that of real estate agents differ, which is why they could not find correlations between prices and variables. Lange and Schaeffer (2001) used a practical approach when they used the prices of hotel rooms in Switzerland to infer that an exceptionally beautiful view generates extra income, both through general pricing and through increased utilization. The conclusion is that the specific increase in value provided by the panorama can be estimated by capitalizing the additional revenue. They also point out that different people prefer different views: in the hotels used as an example, the majority prefers to pay more for a mountain landscape, but guests arriving from Arabic countries prefer a view of a forest and trees.

The results of Benson et al. (1998) obtained using the hedonic model are interesting here. He concludes that housing prices depend on the view (who sees what and to what extent); e.g. a full ocean panorama adds 32% to the property’s value, while a partial ocean view only adds 10%. Yu et al. (2007) created a hedonic model using modern visualization technology (3D geographic information system [GIS]), which estimated the seafront view’s effect on prices to be 15%. The model estimated the view with its content and extent; it represented the view as a single consolidated factor in the regression equation and thus thwarted the many noise effects that made Lange’s model ineffective. Chau et al. (2004) also investigated a consolidated factor in a Hong Kong example. When analyzing new developments, their results showed that having a balcony increased the price by 3.7%, whereby – in an undemonstrable way – the benefits of a view outweighed the remaining positive and negative factors of a balcony. Damigos and Anyfantis (2011) studied the effect of a panorama on value using the fuzzy Delphi method (and the views of ten experts) on real estate in Athens. In contrast to the earlier findings, they concluded that a pleasant view can be worth as much as 50% extra, while an unpleasant view reduces prices by 25%. We later also show that using the expert opinion method in the absence of data can end up significantly overestimating the degree of stigma.

Point source chemical pollution is another emblematic case in professional literature on stigmatized property. These are instances when, e.g. a tank truck full of dangerous goods spills on the road due to a collision, but the Devecser disaster in Hungary (red chemical sludge spilled from a reservoir) also belongs in this category. Cases in literature are very much alike and, in fact, overlap with the topic of landfills. It is difficult to demonstrate by hedonic analysis whether it is a single accident or the long-term effect of waste dumping that results in stigma and impaired value. For a point source chemical pollution event, how the value-changing effect of contamination looks over time is important.

At the same time, it is important to note that property devaluation because of chemical pollution applies only to certain segments. An early research article demonstrates, through nine case studies, that in Silicon Valley, the prices of industrial development sites were unaffected by existing sources of pollution (Scholz 1989). Besides segments, there can be significant differences by value category as well: the value impairment of residential housing worth less is greater, according to a current study (Gamper-Rabindran and Timmins 2013). One of the most dangerous kinds of point source pollution is lead contamination, because lead is undetectable without instruments, and thus using the ground and the water does not make the inhabitants feel at risk. A micro-study (with the hedonic method) in Alabama demonstrated that, as one approaches the source of lead contamination, the value of residential property decreases by 2% for every kilometre (Affuso et al. 2010).

As with the previous topic, biological stigma must also be discussed; however, such a study has not yet been published. The reason for this could be that biological contamination is often specific to the property itself and not an external, environmental hazard. Experts, however, view the fungus infection of a wooden wall or, for instance, mould as stigma. For example, a Serpula lacrymans infection (dry rot) is practically interminable; it can lay dormant for a long time and then attack with great force. In Moscow, the “waterfront houses” by the river, which communist potentates used to reside in, despite all their luxury, were constantly infested by cockroaches brought in by hungry and dirty construction workers. The lives of modern pilgrims are made difficult by the almost ineradicable presence of bed bugs. Prevention of biological contamination is possible with careful implementation and attentive operation, in addition to realizing that moisture generally provides an advantageous environment for these pathogenic agents, and therefore, treatment must begin by eliminating the source of damp. We could say that stigma develops after a past infection that has been treated or which has withdrawn temporarily, since practical experience shows that a belated intervention is often unsuccessful and only provides temporarily relief from the problems of mould, insects or fungi.

The stigmatizing effect of waste dumps is one that is taken most seriously in America, primarily because of the extremely high risk found among people in their vicinity developing cancer (Hamilton and Viscusi 1999). Starting from the 1970s, hundreds of toxic waste dumps have been included in the so-called “Superfund” programme; these areas have then been decontaminated and recycled, and the funding for these activities has been established. This intervention essentially created a new kind of market environment and a new market (Kholhase 1991). Hurd made several case studies of these areas. One of Hurd’s important results is that demonstrable value loss continuously reduces, at first significantly, over time (Hurd 2002). Deaton and Hoehn (2002) draw attention to a mistake in the hedonic method, when, next to the distance from the waste dump, they also introduce the distance from the industrial zone as a variable and realize that the two cancel each other out in the hedonic value, since industrial proximity already points at a bundle of environmental risks (noise, smell and traffic); thus, it is impossible to single out the effect of the waste dump. Environmental hazards have different effects on different segments of the real estate market. Ihlanfeldt and Taylor (2004) estimated the total loss of property value in every segment within a 1.5-mile radius of a contaminated site and found a 10% total decrease in value. It is interesting that some property owners were against including a dump site in the “Superfund” programme, because they were afraid that stigma would result in lower sale prices (Gregory et al. 1996). An Australian case study of the vicinity of a large waste dump found, however, that the negative effect on property value only extends to a radius of a few hundred metres (Neupane and Gustavson 2008).

The American “Superfund” solution to toxic waste dumps was successful in areas where, alongside government regulation, real estate investors were also active and where the media did not keep the topic on the agenda (Greenberg and Hollander 2006). Gayer and Viscusi (2002) examined the opposite of this effect with a hedonic model, when the media release good news about a waste dump’s decontamination. It is a methodological curiosity how the standard flaw in the model is averted by only studying cases where the same piece of property was sold multiple times (at least twice). This still resulted in a dataset of 1,755 cases, in relation to news in the local media. The number of words in the article, whether the news was on the front cover and what information the article published about risks were all included in the regression. The results mostly showed that a positive article increased prices in the investigated waste dump areas by $100–$200 (independently of additional, more detailed variables). An important partial result is that a single positive article’s publication raised the stigmatized property’s value by 0.5%.

Ongoing investments appear at first to be included in the list without reason. At the same time, as a result of the real estate crisis that originated in 2008, there are unfinished and abandoned investments worldwide, from India through Turkey to Central Europe; overgrown sites, empty concrete skeletons and abandoned construction cranes serve as reminders of how the real estate bubble burst. These investments, under construction on paper but abandoned in practice, make up a large group of stigmatized property, because a wealth of specialities, as well as public prejudice, relate to these (Hajnal 2015). As opposed to the standard derivation of market value, the particularities of ongoing investments are the following:

Each piece of real estate differs significantly from the remaining ones;

All these characteristics show a negative opinion attached to such properties, which generally results in depreciation. For the want of related studies, there is professional experience that unfinished constructions carry stigmas.

This topic became current in the US because of the Adam Walsh Act of 2006, requiring sex offenders (armed attackers, pornographers and rapists) to be registered. In Yeh’s study (Yeh 2015), a GIS-based hedonic model demonstrated that, in Nebraska, (registered) sex offenders living within a 0.1-mile radius decrease property value by 4% on average. According to her study, news about such attacks do not provide a demonstrable stigma relating to the attacks’ neighbourhoods, but sex offenders in the mandatory and publicly available register do have an effect on the real estate market. This study reinforced earlier similar studies that were not GIS-based, e.g. Linden and Rockoff 2006. Besides a 4% reduction, they also demonstrated that the property value loss from being the direct neighbour of a sex offender is 12%.

To end the list of stigmatizing effects, here is a rather exotic stigma, which is, however, taken very seriously in certain societies and cultures. The cases of “haunted houses” serve well to underline the mechanics of how the community judges the stigma: houses where a murder or suicide has taken place, where a human immunodeficiency virus (HIV)-infected person used to live, where it is “well known” that ghosts haunt or, simply, if a place has a negative public opinion for some reason. “Haunted” houses could also increase the value due to them becoming a tourist attraction, e.g. Lizzy Borden House or Winchester Mystery House. As Chapman and Ludlum (2014) write, real estate agents’ responsibilities became regulated differently in each member state after a single case, wherein the seller believed the house was haunted, received great publicity. The reactions of people in different neighbourhoods can also be different, depending on whether the owner manages to properly communicate and dissipate (or sustain) the myth. Hofmann takes as an example of a Texan town where mass shootings had taken place in two restaurants during the same night, and while one’s owner communicated the events well to their patrons and could profit from the incident, the other restaurant was stigmatized, avoided and had to be closed and torn down (Hofmann 1999). It is telling that in this case, residents could not even stand the sight of the stigmatized restaurant and installed window covers to their own houses to block the view!

It is interesting that in Japan, a property built above a former well also belongs to this category of stigma. The rents for such property are at least 20% lower than those of similar but unaffected real estate, and there are certain people who flatly refuse to use such a property. It can be seen that society’s common value judgement changes the property’s price, while – at least according to our set of values – nothing restricts its intended usage. In Central Europe, one can perhaps mention cemeteries as a stigmatizing effect that has negative connotations. Among all the effects that a cemetery has on neighbouring property (the place of the cemetery within the city structure, how vacant it is, its vegetation, silence and negative feelings associated with cemeteries), it would be difficult to filter out which is the important one for the market.