The Impact of Municipal Water Use Restrictions on the Pricing of Water-Sensitive Features in Single-Family Homes

Abstract

We investigate the impact of municipal water restrictions in response to a drought on the pricing of water-sensitive home features by homebuyers. In our empirical investigation, we focus on Cape Town, South Africa, which imposed a series of increasingly tightening restrictions ranging from limiting outdoor water usage at the beginning of 2016 to limiting the total water use per person per day to 50 liters (approximately 13 gallons) at the beginning of 2018. Using spatial autoregression with autoregressive errors (SARAR) and a sample of 16,223 transactions over the period of 2015 to 2018, we find that increasing water restrictions reduce the willingness of homebuyers overall to pay for outdoor water-sensitive features such as swimming pools and higher quality gardens. However, pricing effects differ between homebuyers in the low- and high-price segment. In the low-price segment, the premiums for lot size and number of full bathrooms disappear while homebuyers penalize the presence of half bathrooms as water restrictions increase. However, homebuyers prioritize garden quality, which yields a premium irrespective of water restrictions. In the high-price segment, the premiums for half baths, garden quality and swimming pools disappear while the premiums for a larger lot and more full bathrooms are robust to tightening restrictions. Our findings suggest that municipal water restriction policies have an impact on pricing decisions of homebuyers, which has implications for policymakers and real estate developers in developed and emerging countries.

Keywords:

• Drought
• municipal policy
• water restrictions
• house prices
• spatial econometrics

JEL Codes:

• R31
• R38
• Q25
• Q5

Acknowledgments

The authors would like to thank the Valuation Department of the City of Cape Town for providing us with data.

Notes

1 https://www.climate.gov/news-features/featured-images/2017-state-climate-global-drought.

2 https://www.ncdc.noaa.gov/sotc/national/201808.

3 https://www.nytimes.com/interactive/2019/08/06/climate/world-water-stress.html?searchResult Position=2; https://www.wri.org/blog/2019/08/17-countries-home-one-quarter-world-population-face-extremely-high-water-stress.

4 https://water.usgs.gov/edu/qa-home-percapita.html; https://www.epa.gov/watersense/how-we-use-water.

5 https://www.wateronline.com/doc/cape-town-leads-the-way-to-drought-proof-water-tariffs-0001.

6 https://www.saptg.co.za.

7 https://www.absa.co.za/Absacoza/Individual/Borrowing/Home-loans/Property-Research.

8 In South Africa, the lot is called “erf”.

9 https://www.epa.gov/watersense/how-we-use-water.