PSU study highlights impact of water-restrictions on homebuyers in response to droughts

Hose watering a plant

Over the last few decades, climate change and water supply demands have resulted in droughts, which pose a serious problem for a number of regions. As of January 2021, parts of the south-west United States are experiencing exceptional drought conditions, while parts of Oregon and California are in an extreme drought. 

The record-breaking wildfires in Australia, California and Oregon in 2020 are just one consequence of more intense and longer droughts. To fight drought conditions, governments often impose water restrictions on households and businesses. 

A new article from The School of Business at Portland State University investigates how water restrictions affect the willingness of homebuyers to pay for water-sensitive home features such as pools, gardens or bathrooms. Assistant Professor of Finance and Real Estate Julia Freybote and colleagues published “The Impact of Municipal Water Use Restrictions on the Pricing of Water-Sensitive Features in Single-Family Homes” in the Journal of Real Estate Research.

The study focuses on the city of Cape Town, South Africa, which experienced an extreme drought from 2015 to 2018, resulting from the lowest rainfall in the last 100 years. In fact, a “day zero” was forecasted for April 2018 by which Cape Town, as the first major city in the world, would have completely suspended all water supply and required residents to collect water at designated points. 

In response to the drought, Cape Town imposed increasingly tight water restrictions on households over the period of 2016 to 2018. These water restrictions ranged from first limiting outdoor water use for gardens and swimming pools to ultimately setting a personal allowance of water, covering indoor and outdoor water uses. In February 2018, the personal water allowance was approximately 13 gallons per day. This amount of water had to be sufficient for a variety of daily water uses such as showers, laundry, cooking and flushing toilets. In comparison, the average American uses 80 to 100 gallons a day.

The study analyzes how the increasingly tight water use restrictions affected the willingness of homebuyers to pay for home features impacted by the restrictions. 

Prior to the water use restrictions, water-sensitive features of single-family homes (swimming pool, full bathrooms, high quality gardens, larger lot sizes) yielded a premium to sales prices. However, the study shows that water restrictions changed how homebuyers value different water-sensitive features. 

Homebuyers in the lower price segment were no longer willing to pay a premium for more full bathrooms and bigger lots, and even penalize the presence of half-bathrooms in a home. On the other hand, they were willing to continue to pay a premium for a higher quality garden. 

Homebuyers in the higher price segment, on the other hand, were willing to pay a premium for a larger lot and more full bathrooms, even when faced with increasing water use restrictions. However, their willingness to pay a premium for a higher quality garden, swimming pool and half baths disappeared.

Faced with worsening droughts and water shortages in the US, states and municipalities are likely to impose more water use restrictions on households in the coming years. Considering that water restrictions affect the willingness of homebuyers to pay for water-sensitive features, the findings of this study are relevant to homebuilders and policymakers. 

However, the study does not investigate the impact of water-saving features on home values. More research is needed to understand the demand of homebuyers in drought-affected areas for water-saving features (shower heads, low flow faucets), rainwater harvesting, composting toilets and water-recycling features in homes.

The study was conducted by Freybote and co-authors Yiping Fang of PSU’s College of Urban and Public Affairs, and Riëtte Carstens of Stellenbosch University, and as well as with assistance from the Valuation Department of the City of Cape Town.