Hedonic price functions and progressive neighborhood improvement: A theoretical exploration

Neighborhood improvement programs which involve the input of public funding are generally formulated with two goals in mind: to provide a more equitable distribution of goods and services within the metropolitan area and to expand the municipal property tax base. However, a critical factor in the success of any neighborhood improvement program is the way in which the program affects and is affected by the housing market.The relationships between the urban property market, large inputs of public funding and residential mobility are not well understood. This paper investigates the likely effects of public funding on the housing market, under conditions of short-run equilibrium. A modified hedonic price function is used to outline the relationships between housing values, levels of public service provision and the property tax. It is concluded that the goal of expanding the tax base is incompatible with the goal of providing a more equitable (or more progressive) distribution of public goods and services.In addition, there are implications in terms of residential mobility. Taken to an extreme, the stimulation of investment in selected neighborhoods can result in the displacement of lower income households. Unless the relationship between neighborhood improvement and property values is taken into consideration, attempts to bring about progressive neighborhood improvement will ultimately result in regressive solutions.