Working Paper Series,
Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance

Abstract: The capitalization of education resources in housing prices has been widely discussed, however, insufficient attention is paid to its capitalization in rents. This paper mainly aims to identify the capitalization of school quality in rents using 49,438 rental transaction data points from 2016 to 2018 in Beijing, China. In addition, we introduce the propensity score method (PSM) to reduce the sample selection bias and estimate a hedonic treatment effects model by regarding the high-quality school as a treatment within a 750-meter radius neighborhood of rental housing. Our findings reveal that school quality can be significantly capitalized in rents, and that this capitalization varies across not only school quality (ranking) but also space and time. Within rental neighborhoods, high-quality school density can significantly moderate the nearest school’s capitalization, promoting a 3.5% capitalization increase in outer municipal districts but a 3% decrease of top-ranked schools’ capitalization effect in inner municipalities. Further, we investigate school capitalization’s spatial dependency and find that top-ranked schools cannot be significantly capitalized in the rent of outer municipal areas due to existing tenant discrimination. Third-ranked schools can be capitalized into the rent of inner municipalities, probably because of other exogenous factors (e.g., housing prices, public transit). In addition, equitable housing policy shows the potential failure in the municipalities concerning high competition for top schools, as increasing school capitalization that might worsen social inequality between homeowners and renters. In contrast, the policy may remedy school capitalization in less competitive municipalities for high-quality schools.

Keywords: rental housing; school capitalization; propensity score method (PSM); neighborhood school density

JEL-codes: C31; C51; R12; R23; R32; R38

29 pages, December 1, 2021

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