Public and Private Provision of Clean Air : Evidence from Housing Prices and Air Quality in China

We explore the dynamic interaction between housing prices and air quality in a growing economy with changing preferences using panel vector auto-regression. Using Chinese data, we document robust evidence that better air quality is rewarded by the market with higher housing prices and that faster housing price growth in turn contributes to further air quality improvements. The positive impact of housing price growth on air quality is stronger for more developed areas such as eastern China, first-tier cities, and housing markets that grow faster than the median. From a time-series perspective, the contribution of housing prices to air quality improvements has been more pronounced since the Global Financial Crisis, when landscape architecture and energy efficiency gained prominence in real estate development. Further analysis reveals that higher housing price growth improves air quality by motivating public and private investment in environmental protection and enhancement that subsequently leads to better air quality