What determines land values? Classical economists argue that the answer lies in what the land produces. Nevertheless, land itself forms part of the natural environment, which exerts profound impacts on land values. This interconnection between land and the environment is prominently reflected in how air quality shapes land values. How does air quality affect land values? This brief article outlines a case study covering three Chinese cities. Research findings demonstrate that land financing, via capturing land value appreciation driven by air quality improvement, can play a pivotal role in funding clean air investments in China. This research was sponsored by the Lincoln Institute of Land Policy.
Background
Over the past three decades, China has witnessed the largest-scale rural-to-urban population migration in human history. Rapid industrialization has brought rising air pollution in certain cities. As living standards improve, Chinese urban residents are paying greater attention to environmental quality, and local authorities are committed to advancing ecological civilization construction. However, achieving such goals requires massive investment, and few stakeholders have recognized land as a potential funding source.
Improved air quality can boost latent land values, which may translate into higher land-related revenues for Chinese municipal governments. At present, China can effectively capture such value gains through a combination of land use right auctions and land leasing. Therefore, the core hypothesis of this research is that land values rise alongside air quality improvements, enabling a potential virtuous cycle: better air quality lifts land values, creating opportunities for urban administrations to capture additional land revenues. If such proceeds are reinvested into further air quality enhancement measures, the cycle can be expanded to deliver sustainable development. To examine this air-land nexus within China’s context, Shenzhen, Suzhou and Zhengzhou are selected as case study cities.
Modelling the Air-Land Relationship
The research report first constructs a model that separates land values from the values of buildings erected on the land. This critical preliminary step enables us to isolate air quality’s impacts on state-owned land, rather than merely private residential properties. Figure 1 illustrates the spatial distribution of housing prices in Shenzhen, one of the three cases:
Figure 1 Spatial Distribution of Housing Prices (RMB per Square Meter) in Shenzhen
To quantify air quality’s influence on land values, a multi-scale spatio-temporal model is developed to estimate fine-grained PM2.5 pollution distribution. Figure 2 presents the spatial pattern of PM2.5 concentrations across Shenzhen.
Figure 2 Spatial Distribution of PM2.5 Concentrations in Shenzhen
Conclusions: Impacts of Air Quality on Land Values
Model outputs reveal statistically significant negative correlations between air pollution and land values across all three case cities. All other factors held constant, a 10% reduction in air pollutant concentrations raises land values per square meter by approximately 6.3% in Zhengzhou, 9.5% in Suzhou, and 7.7% in Shenzhen respectively.
The proportional co-movement of air quality and land values carries important implications. Drawing on detailed planning documents from the three cities, we quantify land value appreciation generated by moderate air quality upgrades. Taking Zhengzhou as an example, lifting annual average PM2.5 concentrations to Grade II air quality standards will generate an annual land value increment of 2.28 billion RMB for planned development land, with a cumulative total of 34.2 billion RMB over the planning period up to 2035. Shenzhen and Suzhou stand to see even larger land value gains. If both cities reach superior air quality grades, Suzhou’s planned development land will appreciate by 8.2 billion RMB each year, amounting to a cumulative 123.5 billion RMB by 2035; Shenzhen’s planned development land will see an annual value increase of 8.3 billion RMB, with a cumulative total of 125.2 billion RMB through 2035.
These results point to a potential "air-land-air value" virtuous cycle. Across the three case cities, urban air quality improvements have the potential to boost real estate values, which can be converted into a vital fiscal revenue stream for municipal governments. Reinvesting such revenues into infrastructure construction and environmental upgrades that further enhance air quality creates the conditions for a self-reinforcing virtuous cycle of land development.
Authors
Alexander Lord, Professor, University of Liverpool
Erwin van der Krabben, Professor, Radboud University Nijmegen
Guanpeng Dong, Professor, Henan University
June 2022
