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Will pot shops affect property values in your neighbourhood? They did in Colorado

Will pot shops affect property values in your neighbourhood They did in Colorado

As Canada moves closer to legalizing the recreational use of marijuana, many are speculating on how the decision will affect society and the economy. While some are concerned about health and safety effects, others are optimistic about potential new tax revenues and the prospect of bringing the sale and distribution of marijuana out of the criminal sphere.

One area that few are talking about, however, is how legal marijuana will affect residential property markets.

While retail rents are likely to benefit first, housing prices may also get a boost, if the experiences in other jurisdictions that have legalized marijuana are repeated.

Writing in the prestigious journal Real Estate Economics, James Conklin and coauthors studied how the conversion of medical marijuana stores to recreational marijuana stores affected housing prices in Denver, Colo., where the recreational sale of marijuana was legalized in January 2014.

Their research provided strong evidence that homes located near such converted stores experienced a much higher increase in value than houses located farther away — as much as 8 per cent more.

Conklin and his coauthors were meticulous in their research. They implemented several robustness checks and falsification tests to avoid undue influence of spurious correlation. Their results remained consistent and stable and withstood the scrutiny of all tests.

Their results showed that single-family residences situated within 0.1 mile (528 feet) of a medical marijuana store that became a recreational marijuana store experienced an increase of 8 per cent relative to homes sold farther away.

However, dwellings located between 0.1 mile and 0.25 mile from a converted store did not experience any proximity premium. The authors, therefore, concluded that the proximity premium was highly localized.

This finding raises several questions. For instance, why would housing prices report a proximity premium within such a small buffer zone around the converted stores? What possible benefits could a homeowner expect to derive from being that close to a marijuana dispensary, other than ease of access?

Alternatively, why would a homebuyer not buy a structurally similar house that is a little further away, that was not rising in price so quickly? Equally relevant is the question of whether homebuyers who purchased homes near a marijuana store were even aware of the store’s presence.

While Conklin and his coauthors were mindful of these limitations and “agnostic as to the underlying cause of our results,” it is possible to speculate about some potential explanations.

One possibility not raised in the study is that homes around marijuana dispensaries had been subject to a discount prior to legalization, but that legalization lifted the stigma around such homes.

Another is that the stores had knock-on economic effects that were highly localized and boosted the economic profiles of their specific neighbourhoods.

While those are only guesses, theirs is not the only research demonstrating a strong linkage between the legalization of marijuana and higher housing prices.

In a recent paper in Economic Inquiry, Cheng Cheng and coauthors found almost similar results suggesting a 6 per cent premium in prices for homes sold in municipalities that legalized retail sales of marijuana, versus those that didn’t.

Cheng and coauthors found that by August 2015, 46 out of the 271 incorporated municipalities in Colorado had passed laws enabling retail marijuana sales. Using even a more rigorous approach by restricting their analysis to dwellings that sold multiple times during the study period they found similar results as Conklin and his coauthors.

The Canadian government expects annual recreational marijuana sales to be around $4 billion, which will be subject to a 10 per cent excise tax and additional provincial sales taxes. These taxes are expected to raise net new revenue mostly for provinces.

Whether homeowners also see a high remains to be seen.

credit:420intel.com