The Impact of Objective and Subjective Measures of Air Quality and Noise on House Prices: A Multilevel Approach for Downtown Madrid

Abstract

Air quality and urban noise are major concerns in big cities. This article presents an evaluation of how they affect transaction prices in downtown Madrid. For this purpose, we incorporated both objective and subjective measures of air quality and noise and used multilevel models, since our sample was hierarchically organized into three levels: 5,080 houses (level 1) in 759 census tracts (level 2) and 43 neighborhoods (level 3). Variables are available for each level, individual characteristics for the first level, and various socioeconomic data for the other levels. We estimated multilevel hedonic models to assess the marginal willingness to pay for better air quality and reduced noise in downtown Madrid. We found that noise and air pollution are place-based perception variables with a so-called halo effect: residents in wealthier neighborhoods do not perceive their environment as being highly polluted because of their higher “sense of place.” In addition, we found a counterintuitive positive sign for the effect of objective measures of pollutants on housing prices but a significantly negative effect of the subjective measures. For these reasons, we conclude that housing prices are better explained by subjective evaluation factors than by objective measurements.