Dr. Julia Freybote, assistant professor of finance and real estate, was drawn to real estate research because of how it can be applied to so many people and industries. She has focused on a variety of topics throughout her career, but the unifying theme is extreme conditions and their effect on real estate prices. In her recently published study, “The Impact of Municipal Water Use Restrictions on the Pricing of Water-Sensitive Features in Single-Family Homes,” she and her team analyzed variables affecting real estate prices to determine the efficacy of municipal water restrictions.
Analyzing Cape Town’s municipal water restrictions
In 2018, a former student from Cape Town was describing the city’s response to its worst drought in over a century: a very limited daily water allotment with no showers lasting longer than two minutes. The student feared “Day Zero” when the taps would be shut off and citizens would be forced to line up for water at municipal collection points. Freybote, a former resident of South Africa, was appalled. She knew there was an opportunity to research important implications as a result of this extreme scenario.
Cape Town thankfully averted the disaster of “Day Zero.” When Freybote and her colleagues approached the Cape Town’s Valuations Department to ask for data on real estate transactions during the drought period, together they agreed this research could offer broader insight into how effective the water restrictions had been.
In normal circumstances, homebuyers are usually willing to pay a premium for larger houses with more bathrooms, a garden and a swimming pool — all water-sensitive features. Freybote and her team wanted to know if Cape Town buyers would still pay a premium for these features with stringent water restriction measures in place. They analyzed a sample size of approximately 16,000 real estate transactions. The Cape Town housing market is diverse, with buyers across the income spectrum. The research team found different behavior between higher- and lower-income buyers.
With water restrictions enacted, higher-income buyers were still willing to pay premiums for larger properties and more full bathrooms. But the premium disappeared for swimming pools and gardens. Freybote hypothesized that these buyers can afford to install expensive water systems like rainwater harvesters and water recyclers to compensate for the municipal water shortage.
In a drought, lower-income buyers had different priorities. They did not care about property size and more full bathrooms. The presence of half bathrooms in fact acted as a penalty for lower-income home prices. But the most counterintuitive finding was that lower-income buyers were always willing to pay a premium for a big garden, no matter how stringent water restrictions were. In a conversation with Freybote, she theorized that these buyers may not have access to safe public outdoor areas, so it is very important to them to have private outdoor spaces on their own property.
In spite of different buying patterns, this study shows that Cape Town’s water restriction policies were effective because they incentivized novel behavior. By the end of 11 months, municipal water use decreased by 45%, and the city was not forced to shut off taps in residential homes. This finding has important implications in both emerging and developed countries as water shortages increase worldwide. In recent years, Spain, Australia, India, the U. S. and a number of other countries have implemented water restrictions due to droughts. Policymakers need evidence that water restrictions work.
Co-authors of this study include Riëtte Carstens from Stellenbosch University and Yiping Fang from Portland State University.
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