The capitalization of school quality into house values: A review

Abstract

This paper provides a comprehensive review of empirical studies on the capitalization of school quality into house values that have appeared since 1999. We explore their methodological innovations and capitalization results. Most studies find significant capitalization especially for educational outputs, although the magnitudes are smaller for studies with fixed-effects estimation strategies. These studies find that house values rise by below 4% for a one-standard deviation increase in student test scores. Although major conceptual and estimation challenges remain, much progress has been made on this topic.

Introduction

House values provide a window into household demand for public services, including public school quality. Starting with Oates (1969), many scholars have explored the impact of school quality and local property taxes on house values, using a wide range of methods and data sets. This literature has expanded significantly in recent years as measures of student performance on standardized tests, which are key indicators of school quality, have become more widely available. Studies published before 1999 are reviewed in Ross and Yinger (1999), but a comprehensive survey of the studies published since then is not available.¹ This paper is designed to fill this gap. We explore methodological innovations in the recent literature and ask whether recent studies consistently find a significant impact of school quality on house values.

This paper proceeds as follows. Section 2 provides a conceptual framework for thinking about school quality capitalization. Section 3 presents a methodological review of 50 capitalization studies and their results. Section 4 concludes the paper with suggestions for future research.