A hierarchical estimation of school quality capitalisation in house prices in Orange County, California

Abstract

Bidding for proximity to a good school can lead to a pattern of spatial distribution in which households with similar socio-economic status and willingness-to-pay for school quality cluster together. In this paper, we adopt a three-level hierarchical framework using residential house prices in Orange County, California, in 2001 and 2011, to estimate how much homebuyers pay for school quality. Our data show that, during this period, the Academic Performance Index (API) scores of elementary schools in Orange County increased by 16.4% yet converged while the house prices rose by 50.3%. The variation in house prices attributed to school district boundaries was at the same level in both years, but the variation in the API scores shrank. Using a hierarchical random effects model, our estimation results show that, on average, a 10% increase in the API raised the house prices by 1.9% in 2001 and by 3.4% in 2011. Ten years apart, a one standard deviation increase in school quality in the sample increased house prices by a surprisingly similar percentage: 2.7% in 2001, and 2.6% in 2011, respectively. Our findings also reveal that, in both years, there was a significant spatial heterogeneity of school premiums in house prices across school districts. This research provides a spatial understanding of the education capitalisation effects and sheds light on the effectiveness of urban education policy.