Dutch coffee shops selling cannabis have a negative effect on house prices in the surrounding neighbourhoods that is equivalent to a financial loss of up to €10,000 on the average house. That is the central finding of research by Mike Langen, to be presented at the Royal Economic Society''s annual conference at the University of Sussex in Brighton in March 2018.
The study also finds that when many Dutch municipalities closed coffee shops near to secondary schools to reduce the exposure of teenagers to soft drugs, there was a rise in the value of properties in the surrounding areas of the closed shops. The authors suggest that cannabis sales facilities should follow regulations similar to those of pubs and bars, as their effects on surrounding neighbourhoods are similar.
The study notes that the legalisation of cannabis is a hotly contested policy topic. While beneficial to some, the outlets dispensing cannabis may create indirect negative effects for others. This research studies the effects of coffee shops – Dutch cannabis sales facilities – on local house prices in the surrounding areas.
As house prices are highly affected by location, they can be used to measure indirectly the attractiveness of an area. The research defines surrounding houses, using the linear distance to coffee shops as a measure and compares the price of surrounding houses with houses further away.
Using a sample of 250,000 housing transactions between 2000 and 2017, the results document a discount on house prices in the surrounding areas of coffee shops. The discount ranges from -3.6% to -1.5% and decreases with distance to the coffee shop.
For an average house in this sample, this translates into a financial loss of up to €10,000. The study also documents longer times on the market and higher discounts in rural areas.
It could be argued that houses in the surrounding areas of coffee shops already traded at a discount before, and coffee shop openings could be related to neighbourhood characteristics, such as lower income, weakening the causal link.
Analysing neighbourhood characteristics such as the share of minorities and house prices, the study finds that coffee shops are often located at premium locations, competing for customers and tourists.
The research makes use of a government intervention to investigate the effect of coffee shop closings on the surrounding areas: as of 2007, many Dutch municipalities closed coffee shops near to secondary schools (within 250-350m) to reduce the exposure of teenagers to soft drugs.
Comparing house prices before and after closings due to school distance, the research finds that houses in the surrounding areas of closed coffee shops gain between 3.3% to 8.6% in value after closings.
This study documents the external effects of coffee shops on local housing markets, showing negative effects on house prices. Assuming approved legalisation of cannabis, these findings should be considered when regulating the supply chain of cannabis sales. The authors suggest that sales facilities should follow regulations, similar to those of pubs and bars, as their effects on the surrounding neighbourhood are similar.