Location, Location, Location
“As the real estate agent said, “Location, location, location” – and we’re right next door to the airport. It will be very convenient if we have to fly one day.”
Dale Kerrigan, The Castle (1997)
If it’s not the truest, it’s certainly the oldest motto in real estate: location is the prime factor in determining a property’s value. While we hear “location, location, location” all the time in real estate, and we occasionally hear why it is important – better locations are in higher demand, driving up value – what we hear less often is what makes a location “good.” This post will shed some light on the things people tend to value when looking for the perfect home or property.
There are thousands of quirks of location which are “priced in” when a property is listed or bid on – anything from the quality of local schools to provincial labour laws to federal monetary policy can contribute to the quality of a given location. In the end, though all of these factors boil down to four basic human needs that usually need to be satisfied when looking for a home. These could be called The 4 P’s of Location: Proximity, People, Peace and Quiet, and Photogenicity. While there are many ways to categorize all the factors that feed into these needs, these four categories provide a fresh and intuitive way of conceiving the things that make a location desirable.
Proximity is based on a simple maxim: the closer a property is to the places people wants to be, the more valuable that property will generally be. But what kinds of places do people want to be closest to? Generally, the three things that grant the biggest proximity premium are high-paying jobs, high-quality schools, and transportation.
The value of a short commute cannot be overstated in today’s time-is-money society. Academics call this “accessibility” and generally measure it as the distance from a home to a city’s downtown core. The shorter that distance, the greater a home’s price will be, controlling for other factors. Greater accessibility doesn’t just increase the market value of a home, however: it insulates a home from drastic market fluctuations. Take the sharp drop in residential real estate prices during and following the Global Financial Crisis of 2007-2008: the homes whose values plummeted the furthest and the fastest were generally found in those suburban and exurban communities with the longest commutes to their downtown cores, such as California’s Central Valley and Virginia’s Prince William County.
The other amenity that provides a similar boost to home value and price stability is top-tier education. The benefits of nearby high-quality schools are two-fold: they provide better education for residents of the neighbourhood, potentially allowing them to access or create those high-paying jobs, and they boost resale value because people want these opportunities for their children.
Transportation is a slightly different factor from jobs and schools – it extends the effect of the other two variables, and its effects can be both positive and negative. To illustrate the first idea, that it extends the effects of high-paying jobs and good schools, we can look at neighbourhoods like Kingsgate, Washington, part of the Kirkland municipality that is a suburb of Seattle. Prior to the construction of I-405, a north-south freeway that connected it to the technology hub of Bellevue, Kingsgate was relatively inaccessible from the Seattle-Bellevue business district. In the five years after the freeway opened, however, home prices in Kingsgate appreciated significantly more than comparative homes that did not benefit from freeway access. Studies with light rail systems have come to similar conclusions: access to public transit allows people to get to high-paying jobs and increases house prices near those transportation networks.
What the Washington State Department of Transit noticed in its report, however, was a double-edged sword. While house prices generally rise as one moves closer to a highway or rail line, they suddenly plummet as one moves adjacent to the road or railway. This is because roads and railways encroach upon the second of the 4 P’s (and a Q): Peace and Quiet.
Peace and Quiet is the counterbalance to proximity. While we all want to be close to the amenities we access the most, we don’t want to be so close that it’s unbearable to be at home. The accessibility provided by those value-adding subway stations comes at a cost of nuisance and crime. Nuisance can take a number of forms, be it the traffic generated by schools and hospitals, that smell that comes from the water treatment plant, or the smoke pumped out by the nearby pulp mill. In The Castle, the Australian movie whose quote opens this article, Dale Kerrigan learns the risk of living next to an airport when the government decides to expropriate his home to build a runway extension. Dale is no stranger to nuisance, however, as he has ironically chosen to build his home on top of a landfill and below power lines.
Just as important as the effect of nuisance can be the perception or expectation that a project will intrude on residents’ peace and quiet. Researchers at Illinois State University examined the effect of a new wind farm on home prices in McLean County in central Illinois. Before the construction of these wind farms, the denizens of McLean County had heard a good deal about the danger and nuisance created by the turbines on wind farms. Before the project was even approved, home prices around the approved site plummeted. Once the farm had been built, however, and residents realized the potential nuisance had been exaggerated by opponents of the wind farm, property values rebounded to an even higher level than they had been before the wind farm controversy. This is a great example of the power of accurate information – and the benefit of trusting experts.
The residents of McLean County had another P on their minds when they were discussing the merits and drawbacks of the proposed wind farm – would these turbines be an eyesore? This touches on the third P of location value, Photogenicity. We all know of the value of a great view, but things that seem purely aesthetic at first blush can provide a great indicator of the risks and benefits of a location.
Take that elevated view of the city that so many people pay a premium for. Yes, it is true that views affect the price of a home, especially so in higher-end markets. Those with the means to do so are willing to pay a premium for a view – a 2002 study found that a waterfront view is one of the most significant determinants of home value, rivalled only by square footage and lot size. However, that view may come with a hidden cost, at least in some neighbourhoods. Getting that stunning view often means moving into harm’s way, be it the wildland/urban interface that produces so many life-threatening fires in San Bernardino, California, or the increased risk of storm damage that come with an oceanfront property. The “photo test” of home value illustrates the many tradeoffs that can bedevil first-time homebuyers as they look for the perfect location.
The value of aesthetics goes beyond waterfront views, however. Academics like to say that good architecture, for example, is a “public good” – a beautiful building contributes to the value of homes around it. Part of the increase comes from the value of pure aesthetics, but good architectural design can spur economic development and foster a sense of a welcoming, safe neighbourhood. This points to the dual value of aesthetics – they are desirable for their own sake, but they also serve as barometers of other important factors, such as quality of neighbours, crime rate, and the overall well-being of a community.
This leads into the last, but maybe most important, of the 4 P’s: People. Simply put, amenities that foster a sense of community will draw people to a neighbourhood. These can include private enterprises like shops, restaurants, and theatres, but also public goods like parks or boulevards, and events like farmer’s markets, outdoor concerts, and other civic events.
The website Walkscore.com boils all of these intangibles down into an index that purports to indicate how “walkable” a neighbourhood is. The concept behind it is simple: you feel like part of a community when you’re able to park your car, walk around, and interact with your neighbours. Walkscore uses a number of criteria, but the basic idea is that people are induced to walk if there are short blocks, narrow streets, wide sidewalks, “human-scale” lighting, landmarks, and complexity of architecture – cookie-cutter subdivisions are less conducive to community events than urban blocks with mixes of residences, businesses, and public spaces.
Take Haymarket, a neighbourhood just south of Sydney, Australia’s downtown core. Home to the famous Paddy’s Market, Haymarket consists of homes and businesses tucked into historic buildings that are near public transit and event venues. Although Haymarket doesn’t possess the waterfront views endemic to many parts of Sydney, it consistently commands high values for residential units. It’s no coincidence that Walkscore lists it as Australia’s most walkable locale.
These 4 P’s are anything but scientific, but hopefully they will give you an understanding of why that ramshackle bungalow is listed for seven figures in the classified section – there are many factors inherent to location that can greatly influence the value of a property. Realtors and Real estate appraisers understand how these factors contribute to house prices, but their valuation methods are far more nuanced and technical than what has been discussed here – real estate professionals must stay abreast of market trends and monetary forces that are factors in every housing market. At the end of the day, it takes an expert’s knowledge to find the right price for a location, which is why I urge you to speak with a good realtor when considering a foray into the real estate market.
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