Does Declining Air Pollution Levels Always Signal Higher Premium for Housing Market?

In this paper, we investigate the effects of air quality on housing prices from the short-run and long-run perspectives. We utilize monthly housing price data and the particulate matter 2.5 (PM2.5) index for prefecture-level cities in China. Relying on instrumental variable (IV) estimation and dynamic common correlated effects-pooled mean group (DCCE-PMG) techniques, our results reveal a short-run negative causal and a long-run inverted-U relationship between air pollution and housing prices. This finding suggests that the effect of anti-pollution efforts on housing prices is nonmonotone; initially having a favorable effect and then after reaching a certain turning point, the pollution reduction effort is associated with depression in housing prices. We further find that the heterogeneity in the points of different cities can be explained by socio-demographic factors. Specifically, our results reveal that while pollution-reduction campaign initially had effects related to willingness-to-pay (WTP) theory, further control measures had an adverse effect on housing prices. Thus, our study presents important implications for the effectiveness of environmental regulations.