The Value of School Quality Under Free Choice : An Empirical Study of School Quality on Residential Prices in Västerås, Sweden

Abstract: Education is one of the most important public goods that society can provide, and researchers have since long agreed that schools' performances are capitalized into residential property prices. However, all previous research is based on residential markets where school districts prevail. This study aims to investigate how the capitalization of residential properties are affected when pupils have free choice and how proximity to schools affect this relationship. The study covers the years 2011 to 2018 and is based in Västerås municipality, Sweden. Through a hedonic pricing model with a semi-logarithmic form, that includes both fixed effects through postal codes and yearly fixed effects, we can show that school quality is capitalized into residential property prices. The quality of schools is estimated through four types of school characteristics; pass rates in national tests, pupil-to-teacher ratio, pupil ethnicity and parental educational background which are combined into a single variable using Principal Component Analysis (PCA). Using geo-coordinates, school characteristics are assigned to properties in two different scenarios. In the first, only school characteristics of the closest school are assigned to properties. In the second, properties are assigned the average characteristics of all schools within a radius of 875 meters from the home i.e., walking distance for pupils in third grade. Our results show that quality of education is capitalized in property prices even if pupils are not limited by school districts. We find that if school quality is improved by one unit, the price of local apartments and houses increases by 2.13-3.06% and 2.07-2.19%, respectively. The results also indicate that capitalization is affected by how many schools are within walking distance. Residentials in close proximity of several schools have more options and thus experiences a stronger capitalization effect than properties close to only one school.