Housing externalities - The impact of exterior renovations on housing prices in Helsinki

Abstract

This paper aims to quantify the spillover effect from exterior renovations in Helsinki, to investigate whether a positive spillover effect exists from renovating the exterior of houses and whether they should be subsidized. The empirical assessment uses permit data from The city Helsinki between the years 2002 to 2020 to determine which houses have been renovated. The empirical research utilizes the difference in differences method to determine whether the renovation has resulted in a price increase. The houses that have sold within a 250-meter radius from the renovated house are considered the treatment group. In contrast, the houses that have been sold within a radius over 250 meters up to 500 meters from the renovated house are considered the control group.

An exterior renovation appears to increase house prices by approximately three percent for the houses within 250-meter proximity from a renovated house. Moreover, the spillover effect seems to be the most prominent in Helsinki's West and Southeastern parts. Several assumptions need to be met in order to trust this result. Firstly, the parallel trends assumption needs to hold. This assumption has been controlled for through a descriptive analysis which suggests that the parallel trends assumption holds. Secondly, since the study relies on permit data, it is hard to estimate when exactly the renovations have commenced and completed. Since permits that have been granted need to commence within three years in Helsinki, the assumption is that most renovations have begun and are completed within three years. However, through a robustness check that changed the time interval, there are some worrying results. The estimate for the spillover effect stays approximately the same when expanding the time interval from one to five years. This might suggest that the exterior renovations have been completed at different times. On the contrary, another robustness analysis, testing the spillover effect changes with distance, supports the positive spillover effect.

Given that the two assumptions hold, there does indeed seem to be a positive spillover effect that is the most prominent in the Southern and Southeastern parts of Helsinki. This is also supported by the literature on neighborhood improvement, which has found a positive spillover effect that is approximately the same size. Thereby there is evidence that could support that exterior renovations should be subsidized. Moreover, the literature on foreclosures has found that neglecting the exterior in some cases can lead to a negative externality, meaning that with the looming threat of environmental crisis, exterior renovations could maintain the value of houses.