the hidden subscription most of us love to pay.
what’s in it for you?
• learn how Central Park reshaped Manhattan's real estate market
• grasp the concept of hedonic pricing and how it directs your rent
• approximate your monthly green space subscription
9-12 minute read
Whether it is the morning walk with our furry friends or winding down after a long day - in the intricate tapestry of urban living, neighbouring parks emerge as a tranquil oasis, a respite from the corporate frenzy and concrete sprawl. While these verdant hubs promise relaxation, picnics, and outdoor sports, it is the widespread allure of parks that shapes the trajectory of entire neighborhoods, engaging in a subtle yet captivating dance with our rental markets.
the rent hike waltz.
New York City in the modern era is famed for many things - be it its mesmerizing skyline or bustling financial district. But long before the first skyscrapers, New York gained recognition for the innovative establishment of the 3.41 sq. km sized Central Park in 1858 - later remembered as the "most profitable investment [...] and a great success" [1].
While the Big Apple's property values nearly doubled from 1853 to 1876, the three wards closest to the Central Park skyrocketed, moving from a humble 26 million to more than 235 million USD within the same 23 years. The expanded property values in turn yielded higher property tax income for the local administration. Comparing the development costs of around 13 million USD with the annually generated excess tax income of 4.4 million showcases the financial benefits generated by the park [2]. However, we need to keep in mind that the real establishment costs should have been higher as the park land was acquired using expropriation laws ("eminent domain") which involved the controversial displacement of more than 1500 inhabitants of Seneca Village, a once thriving African-American owned town on the present site of the park. The displaced landowners considered the compensation for their land insufficient and unfair [3].
Nowadays, the iconic Central Park serves as a cultural landmark, drawing in outdoor sport fans, families and entire wedding ceremonies, but also real estate developers, salivating at the prospect of charging a premium for park-adjacent dwellings - frequently called the Central Park effect.
By comparing Central Park’s bordering property prices with median real estate transactions within the same neighborhood, we can approximate the effect. In 2018, properties in Manhattan’s northern district Harlem charged front-row seekers only an additional 125k USD (+21% of the neighborhood median sales price), while luxurious park properties in Central Midtown required 3.7 million in excess cash (370% of the median neighborhood sales price). Across all adjacent districts, having the Central Park as your front yard will cost you approximately 25% additional rent [4].
Figure 1: Central Park Effect in 2018, data from PropertyShark - Real Estate Report [4]
Yet the Central Park effect is not an isolated occurrence at all. The seemingly harmless addition of a pocket park could indeed inspire similar reactions, sparking bidding wars among renters and developers, all vying for a park view [5]. Ultimately, the phenomenon is neither limited to landmark parks nor a result of greed-driven speculation. Real estate research across the globe finds that proximity to green spaces generally affects the price we pay for our four walls. But this proximity principle does not always work in the same direction, nor is the strength universal. In other words, while New York City’s Central Park increases prices of adjacent properties on average by 25%, the effect of nearby parks in other urban settings may add only 10%, or even reduce prices in some neighbourhoods. By using larger data sets that encompass housing features and respective housing (rental) prices, scientists use statistical methods to quantify these relationships for individual cities.
the monthly park subscription.
To avoid sedating you with overbearing theory, let’s start from the following idea: Buying a house means implicitly choosing between different desirable and undesirable housing features - size in sq. metres, number of rooms, time to nearby train stations, years since construction, balcony direction and so on. A garden or access to nearby green space is equally considered a valuable housing feature. At the same time, housing is immobile - there is exactly only one apartment in a given location with specific features. As a result, apartments are never perfectly comparable (“heterogeneous goods” in fancy econ lingo).
In the absence of straightforward comparability or some sort of standardised “housing quality” measurements, economists instead utilise so-called hedonic pricing to measure implicit prices of certain housing characteristics. The underlying logic is surprisingly simple - as we all search for the best apartment within our budgets, the final housing price we end up paying is just the sum of our willingness to pay for all attributes of the apartment, plus or minus some random stuff (e.g., individual negotiation skill). Following this thought, the total property price or the respective monthly rent can then be dissected into individual prices for each characteristic.
Transforming these ideas into a quantitative form yields the so-called hedonic price function in which the housing or rental price (P) is determined as sum of various property characteristics (x_1, x_2, …), multiplied with the associated utility or pleasure derived from the respective characteristic (β_1, β_2, …).
Turning towards a practical example, the more rooms an apartment has, the more utility it provides. The increased utility then translates into a higher willingness to pay and ultimately a higher sales price requested by owners. To simplify further, let's assume we live in a world where apartments have exactly two characteristics. One feature is the number of rooms, basically a plain number above 0, while the other feature is access to the nearby park, yes (1) or no (0). Loading up our statistical software of choice with enough apartment profile and price data, we could use good ol' linear regression to determine a hedonic price function, comparable to Figure 2.
Figure 2 - Simplified hedonic pricing, general form and hypothetical results, own representation
As discussed above, the price is presumably equal to our willingness to pay as well as being a direct result of the features of the individual apartment, multiplied with the individual retrieved utility per characteristic. While we could already count the number of rooms and evaluate park access of each apartment, the retrieved utility per characteristic remained unknown. However, with the help of our beloved regression analysis, we would have been able to find the average retrieved utility per characteristic, which allows us to understand the price effects of different apartment features.
To avoid confusion and enable straightforward interpretation, the regression results (β_0, β_1, β_2) have been artificially constructed. Furthermore, we assume that we gain the same utility or pleasure from three rooms as we gain from 300 additional rooms, although most of us would likely be satisfied with just a few more rooms rather than dealing with an outsized castle. In reality, our utility derived from an apartment or house would rather follow a saturation curve as, at some point, “enough is enough”. Economists typically call this concept “diminishing marginal utility” and also found a way to include it in the hedonic price function, yet to keep things simple, we will not venture there today.
so how is the math mathing?
Sir. Sir …? Sir …please wake up! What shall it be? An extra room for 150 USD per month or rather access to a nearby park for around 100 USD?
Figure 3: Extra room or park access? [6 ,7]
In fact, the dynamics boil down to this simple reasoning. Assuming constant characteristics, we can read from the formula how much we will have to pay on average for an improved apartment with additional parking access or one more room. Inversely, we can now even estimate an approximate price for a given apartment profile in case prices are unknown.
park subscriptions across the world.
After all the theory, it's time to take a look at the reality. With the advent of data management technology and breakthroughs in statistics, hedonic pricing has gained tremendous popularity over the years. From the vast mass of research, we have selected the most tangible examples for you.
EUR/USD = 1.07 as of 14th of September 2023
In the rising metropolis of Shenzhen bordering Hong Kong, researchers found that proximity to parks increased the total property sales price by more than 3300 USD per km of distance. However, the identified area of effect covered “only” a radius of around 1.7 km around the park, weakening with growing distance [8]. Their European colleagues identified similar effects, albeit within a smaller radius. In Leipzig, Germany, properties within a 300m radius presented rising house sale prices of additional 1.50 EUR (≈ 1.60 USD) per apartment sqm, for each meter of distance closer to the park [9]. Spanish researchers meanwhile identified an analogous relationship - decreasing the distance from a park by 100m raises the sales prices by 1800 EUR (≈ 1930 USD) [10].
To standardize across currencies and local land prices, two other research papers quantified the proximity principle in relative terms. In Belfast, a city in the United Kingdom, apartments adjacent to the park were up to 49% more expensive than their peers without any park access [11]. On a macro level a comparable trend can be seen across the entire country of the Netherlands. Analyzing more than 200,000 properties and respective real estate transactions, a team of researchers derived a 16% price premium for properties within a 500m radius of parks [12].
However, as outlined before, both the strength as well as the overall direction of the proximate principle differ. In Setagaya-ku, a district of Tokyo, property values barely reacted to the presence at all. The authors even concluded that a renewed analysis with additional factors could uncover detrimental effects of parks on housing prices [13]. While only theory in Japan, this negative relationship was empirically discovered in Adelaide, Australia. While nearby small and managed green spaces consistently boost prices, their unmanaged, wildlife preserving or rather “breeding” counterparts actually cause property values to shrink [14].
Table 1: Overview of academic studies focussing on the effect of parks on nearby property prices, inspired by [15]
We discovered - parks are already valuable - although co-benefits and indirect value creation such as local electricity savings are hardly taken into account. (Sounds interesting? Click here). But now we are curious about your experiences — have you experienced the park premium in your city? Are you aware how much your personal monthly park subscription is? Let us know in the comments!
our two cents
Parks provide a variety of benefits and most of us appreciate their existence. But how much do we actually value them (in monetary terms)? Hedonic pricing provides a simple, yet effective framework to assess urban green space value - we should make this technique widely accessible among general public to generate awareness for the value of nature we want to have around us.-
[1] Crompton, John L. "The impact of parks on property values: A review of the empirical evidence." Journal of leisure research 33, no. 1 (2001): 1-31.
[2] Crompton, John L. "The Impact of parks and open spaces on property values." Departman of Recreation, Park and Tourism Sciences Texas A&M University 63, no. 1 (2007): 32.
[3] Central Park Conservancy & Tricia Kang, “160 Years of Central Park: A Brief History”, Website, (2017), Available here: https://www.centralparknyc.org/articles/central-park-history
[4] Propertyshark “Real Estate Reports - What park premium are new yorkers paying to live near central park” Available here: https://www.propertyshark.com/Real-Estate-Reports/2018/09/25/what-premium-are-new-yorkers-paying-to-live-near-central-park/
[5] Kuroda, Yuta, and Takeru Sugasawa. The value of scattered greenery in urban areas: A hedonic analysis in Japan. No. 128. Graduate School of Economics and Management, Tohoku University, 2022.
[6] Picture Source, Unsplash, Account name: Phil, “minimalist photography of open door” https://unsplash.com/photos/5i0GnoTTjSE
[7] Picture Source, Unspalsh, Account name: Naveen Kumar,”couple under brown tree during sunset”, https://unsplash.com/photos/7sBeKoJbn6I
[8] Wu, Jiansheng, Meijuan Wang, Weifeng Li, Jian Peng, and Li Huang. "Impact of urban green space on residential housing prices: Case study in Shenzhen." Journal of Urban Planning and Development 141, no. 4 (2015): 05014023.
[9] Liebelt, Veronika, Stephan Bartke, and Nina Schwarz. "Hedonic pricing analysis of the influence of urban green spaces onto residential prices: the case of Leipzig, Germany." European Planning Studies 26, no. 1 (2018): 133-157.
[10] Morancho, Aurelia Bengochea. "A hedonic valuation of urban green areas." Landscape and urban planning 66, no. 1 (2003): 35-41.
[11] McCord, J., M. McCord, W. McCluskey, P. T. Davis, David McIlhatton, and M. Haran. "Effect of public green space on residential property values in Belfast metropolitan area." Journal of Financial Management of Property and Construction 19, no. 2 (2014): 117-137.
[12] Daams, Michiel N., Frans J. Sijtsma, and Arno J. van der Vlist. "The effect of natural space on nearby property prices: accounting for perceived attractiveness." Land Economics 92, no. 3 (2016): 389-410.
[13] Hoshino, Tadao, and Koichi Kuriyama. "Measuring the benefits of neighbourhood park amenities: Application and comparison of spatial hedonic approaches." Environmental and Resource Economics 45 (2010): 429-444.
[14] MacDonald, Darla Hatton, Neville D. Crossman, Parvin Mahmoudi, Laura O. Taylor, David M. Summers, and Peter C. Boxall. "The value of public and private green spaces under water restrictions." Landscape and Urban Planning 95, no. 4 (2010): 192-200.
[15] Crompton, John, and Sarah Nicholls. "The impact on property values of distance to public parks and open spaces: findings from beyond North America." World Leisure Journal 64, no. 1 (2022): 61-78.
