Thursday, September 20, 2012

Shale Gas Development and Property Values: Differences across Drinking Water Sources

Abstract: While shale gas development can result in rapid local economic development, negative externalities associated with the process may adversely affect the prices of nearby homes. We utilize a triple-difference estimator and exploit the public water service area boundary in Washington County, Pennsylvania to identify the housing capitalization of groundwater risk, differentiating it from other externalities, lease payments to homeowners, and local economic development. We find that proximity to wells increases housing values, though risks to groundwater fully offset those gains. By itself, groundwater risk reduces property values by up to 24 percent. 
[The mean transaction for the final sample was $127,233.  For the full sample it was $103,462.]
The authors first report results for our cross-sectional specification, where they regress logged transaction prices on regression controls for property and census tract attributes, year dummies, and several treatment variables. These treatment variables include both inverse distance to the nearest drilled well and this variable interacted with a dummy for groundwater (which equals one if the property is located outside a Public Water Service Area - PWSA). This allows us to separately identify the impact of proximity to a well for households living in groundwater areas. They expect this coefficient to be negative, as being closer to a well causes a greater risk to households living in groundwater areas.
In their first Ordinary Least Squares (OLS) specification for a PWSA property that is 1000 meters away from a well pad, the percent change in price from a one meter increase in distance is -0.03 percent, implying positive impacts on property values from proximity to wells.  The comparable result for groundwater-dependent properties is inconclusive given that the coefficient on the interaction term is insignificant.
The signs of the coefficients from the Fixed Effects (FE) specification are similar but larger and more significant than under the OLS specification. For the full sample (including cities), they find a positive impact of drilled shale gas well proximity on property values, though it is negative (and larger) for those households living in groundwater areas. This implies that shale development causes an increase in property values in general (perhaps due to lease payments, increased economic activity, or higher rental prices), though properties that do not have access to piped water have an overall negative impact due to shale gas development risks. When they exclude the cities, this effect is even more pronounced: the size of the coefficient on proximity to drilled wells decreases, suggesting that the effect of increased economic development is concentrated in the cities. The results imply that the marginal change in property values from moving one meter farther from a well is -0.0764 percent for PWSA properties and 0.059 percent (0.076%-0.135%) for groundwater-dependent properties.
Similar to the cross-sectional and FE results, the authors find that property values go up after a well pad has been drilled within 2000 meters, while properties that rely on groundwater are negatively affected by exposure using difference-to-difference estimates.  They find that permitted (but not drilled) wells do not have a significant effect on property values in our final specification, though controlling for these wells reduces the impacts (both positive and negative) of the treatment on property values.... Though insignificant, the parameter estimate on the interaction term of permitted wells with the groundwater indicator is large and negative, providing some evidence that permitting may be negatively capitalized into the property value by groundwater homes. This could be due to the fact that the new home buyer is aware of the forthcoming drilling activity due to incoming lease payments or that construction has already begun to occur nearby.
The estimates in the final specification ... demonstrate that properties in the PWSA positively capitalize proximity to a well pad by 10.7 percent, and this result is statistically significant. This is most likely due to lease payments, which allow properties in the PWSA to increase their values while avoiding the risks (or perceived risks) of contaminated groundwater. For properties that depend on groundwater, however, the estimate of the effect of drilling a well pad within 2000 meters implies a decrease in property values of 23.6 percent. The net impact of these two effects is made up of a statistically significant reduction in value of 23.6 percent attributable to groundwater contamination risk, partially offset by the 10.7 percent increase (likely) attributable to lease payments. Their difference (-12.9 percent) while not itself significant,28 suggests that, in contrast to PWSA homes, prices of groundwater dependent properties certainly do not rise as a result of nearby drilling, and may fall because of groundwater contamination risk.

by Lucija Muehlenbachs, Elisheba Spiller, Christopher Timmins
National Bureau of Economic Research (NBER)
NBER Working Paper No. 18390; Issued in September 2012

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