Lots of value? A spatial hedonic approach to water quality valuation Janne Artell* MTT Agrifood Research Finland, Latokartanonkaari 9, 00790 Helsinki, Finland (Received 28 May 2012; final version received 30 January 2013) Very few studies have addressed the effects of water quality on recreational values in a hedonic property price setting. This study elicits the value of improved water quality capitalised in Finnish recreational property prices adjacent to the Baltic Sea, lakes and rivers. In addition, spatial econometric methods are employed to address the spatial autocorrelation found in data. An expert-determined, water body specific water quality index that describes the usability status of the water is used instead of more specific, but also more problematic, water quality indicators. The study finds that water usability has a positive effect on property prices, with weak suggestions on non-linearity. Keywords: valuation; hedonic pricing; water quality; water framework directive 1. Introduction Growing wealth and leisure time have increased the demand for waterfront properties. As the supply of existing properties is not enough to sate the need, landowners bring undeveloped lots to the market for people to build their summer cottages on. These buildings more often resemble second homes than the crude dwellings of previous decades. Indeed, the social phenomenon is strong in Northern America and Northern and Eastern Europe, but especially so in Canada and Scandinavia (Bendix and L€ ofgren 2007). As consumers are willing to invest more in recreational opportunities through property purchases, the quality of nature-provided amenities grows in importance. The water environment is a central provider of popular recreation opportunities such as swimming, fishing and boating. There is increased concern about surface water quality in Northern Europe where water quality is threatened by eutrophication. Eutrophication is caused by an excess influx of nutrients increasing the occurrence of undesired events such as algal blooming and changes in the composition of fish species. The Finnish Environment Institute (2004) recognised eutrophication as the main threat to national waters due to shallow lakes and coastal areas and relatively slow river discharge. These concerns induce pressure to assess the value consumers put on water quality in property purchases. In addition, there is a political need for the cost-benefit assessments of water policies such as the European Union Water Framework Directive, WFD (European Commission 2000) and the Marine Strategy Framework Directive (European Commission 2008). Despite the obvious need for valuation information, to date there are only a few hedonic property price studies on water quality, even though the problem was already recognised a decade ago by Leggett and Bockstael (2000). These studies, e.g. Michael, Boyle, and Bouchard (1996, 2000); Leggett and Bockstael (2000); Poor et al. (2001); Poor, Pessagno, and Paul (2007); Gibbs, Halstead, and Boyle (2002), exclusively *Email janne.artell@mtt.fi Ó 2013 University of Newcastle upon Tyne Journal of Environmental Planning and Management, 2014 Vol. 57, No. 6, 862–882, http://dx.doi.org/10.1080/09640568.2013.772504 Downloaded by [Stockholm University Library] at 20:28 12 November 2015