A BDD-Approach to Estimating the Effect of School Quality on Residential Yields

My main area of interest is the intersection between urban economics and real estate finance. Both fields play an important role in determining residential markets as they explain largely how rational economic agents act. Simplified, agents find their utility/ profit maximizing consumption that corresponds to a certain amount of parcels of land, subject to their budget constraint, and preferences for a bundle of property characteristics.

My research would identify what drives a wedge between the rental and sales markets - what differentiates agents in each market. Both markets are inherently very similar as they both trade the same asset in comparable geographies with the key separating factor being resident tenure type - renter or homeowner. Assuming that the available dwellings are identical for both markets, and neither has inferior quality, any divergence between the two markets stems from differing agent behaviour.

With this project I seek to study the effect of residential amenities on residential property yields. If the rental and sales markets are identical, then yields should be unaffected to amenity shocks - both markets respond identically in magnitude. Thus, if there is no effect the marginal willingness to pay is the same for both.

However, using a hedonic model, I found in my MSc dissertation Hummel (2023) that a decrease in school quality corresponds with a negative effect on yields. This implies a heterogeneity between renters and homeowners. I would seek to expand on the topic and explore the different agent behaviour and preferences.

To be able to study the effect of amenity shocks on residential yields I will use a UK-wide merged dataset from the HMLR Price Paid Data Set, DLUHC's EPC Data Set, and Zoopla UBDC Data Set. From that I can create the main dependent variable (residential yields). In addition, using a repeat-sales methodology with the HMLR Data Set will allow me to create a constant annual growth rate to estimate the past average annual property appreciation.

Additionally, I will seek to add more robustness to the analysis by including more controls, e.g. distance to nearest public transport hubs or tube stations.

As a primary amenity shock I seek to exploit school catchment areas and generate variation in school quality through a boundary discontinuity framework. With the BDD methodology, for the identification strategy to succeed, I imply that nearby transactions, on separate sides of the boundary, will experience similar neighbourhood amenities (smooth) but face a difference in school selection.

Previous literature has made frequent use of BDD methodology with success, although not within a residential property yield context (Black, 1999; Gibbons, Machin and Silva, 2013; Fack and Grenet, 2010; Nguyen-Hoan and Yinger, 2011).

Beyond the academic setting to studying agent behaviour, it can also provide insight for targeted government policy, as well as benefit investors and developers who are able to adapt their strategies given an area's characteristics. It is especially important for the government with increasing costs of housing if they are able to understand what renters and what homeowners value.

From an investor perspective, for example, if an area has a lower yield, it may be better to target a development that is sold rather than a development where returns are generated through rental streams.

For my first project of a PhD in Economic Geography, I propose to study the effect of residential amenities (school quality) on residential property yields using a boundary discontinuity design in order to empirically test the differences between the two markets. In addition, the second part of the paper will be dedicated to developing a theory linking amenity provision and yields to disentangle the relationship between residential rental and residential sales markets.