HOUSE PRICES: NEW ESTIMATES OF THE IMPACT OF LOCAL SCHOOL QUALITY

Family income plays a significant role in determining access to the best schools, including state schools. It does not matter whether good schools are provided 'free' out of taxes or through the private market in education. If you cannot afford the fees, you will not be able to afford the house that gets your kids access to the best state school either, since school quality is reflected in local house prices.

That is the central conclusion of research by Professors Paul Cheshire and Stephen Sheppard, published in the November 2004 Economic Journal. At the same time, their study shows that the impact of a good school on the price of a house is far from given:

• The impact of local policy: the more critical it is to live in precisely the right spot to get into the school of your choice, the higher are house prices of a given quality. This study focuses on houses and schools around Reading, where nearly all children go to the primary and secondary schools assigned on the basis of where they live. But in some parts of England, catchment areas are much more 'porous' so families don't pay so much in the housing market to live close to a good school.

• The impact of likely future school quality: it is not just the current quality of the local schools that is reflected in house prices but the likelihood of that quality continuing in the future. Home-buyers seem to discount for risk: the more the variability in a primary school’s past Key Stage 2 results, the less is paid for current school quality.

• The impact on family homes: the price you have to pay for access to a good school increases in proportion to the suitability of a house for children. The better a house is as a family nest, the proportionately more its price increases if it is in the catchment area of a good school.

• The impact of private schools: the cost of private schools seems to set an upper limit on the price people will pay in the housing market. The added cost for a home with access to the very best state schools is surprisingly close to the total cost of school fees for comparable private schools in terms of exam results.

• The differential impact on primary and secondary schools: primary school quality contributes more to house prices than secondary schools but mainly because there is much more variation in the performance of primary schools. The researchers estimate that if an average house could be moved from the worst to the best possible secondary school catchment area, then its value would increase by nearly 19% or £23,750. But moving the access of an average house from the worst to the best possible primary school would increase its price by nearly 34% or £42,550.

• The impact of the very best school: the real house price premium is paid only for the very best schools. Just the top 10% of the school quality distribution generates most of the price increases from worst to best possible school. Only the 'best' schools command major money: being in the catchment area of an average school compared to even that of the very worst has hardly any impact on prices.

The research indicates that when paying for access to better schools, people behave in a very rational and discriminating way, suggesting that housing markets work much more effectively than is usually believed.

This helps to explain the variation in house prices, but it also underscores the role of housing markets in perpetuating inequality and social exclusion. The ‘consumption’ of educational quality – what might even be described as life opportunities – seems to have become like any other private good, with income having a strong influence on ability to get access to it.

The estimates in this study were made from a sample of 490 houses sold in the Reading area during 1999 and 2000. School quality was measured by performance in Key Stage 2 tests and GCSE exams in the period leading up to the house sale. Many factors influence house prices, of course, and part of the aim of the study was to show how important it is to include and represent all these factors as accurately as possible.

For example, because primary school catchment areas are small, there is a danger that other local factors – including proximity to urban open space – will distort their estimated value unless they are included in the analysis. Not including an appropriate measure of the social and economic characteristics of the neighbourhood, for example, produced a greatly inflated apparent value of primary school quality: it increased sevenfold in absolute terms. Similarly, many studies have not precisely allocated houses to actual school catchment areas but rather assumed that children went to the geographically nearest school.

The data analysed here included information about environmental amenities, such as local open space, noise disturbance, garden size and whether the house is beside the Thames. These were linked to socio-economic data about neighbourhoods. Such factors, as well as the quality of local schools, really make a difference to house prices.

ENDS

Notes for editors: ‘Capitalising the Value of Free Schools: The Impact of Supply Characteristics and Uncertainty’ by Paul Cheshire and Stephen Sheppard is published in the November 2004 issue of the Economic Journal.

Cheshire is at the London School of Economics; Sheppard is at Williams College, Massachusetts.

For further information:
contact Paul Cheshire on 020-7955-7586 (email: P.Cheshire@lse.ac.uk);
Steven Sheppard via email: Stephen.C.Sheppard@williams.edu; or
RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).