Reducing air pollution in China’s urban areas can improve local housing markets

China’s air pollution is among the worst in the world, according to the World Health Organization (WHO) 2016 Ambient Air Pollution report, which found the country’s annual average concentrations of fine particulate matter (PM) to be four to five times higher than the levels recommended by WHO Air Quality Guidelines. This is a significant problem for urban areas, with major public health and ecological impacts.

The Chinese government has taken steps in recent years to reduce air pollution, including closing and relocating highly polluting coal-fired power plants in urban areas. One third of the world’s coal-fired plants are in China (though coal is still expected to account for most of the country’s total energy generation). These relocations not only reduce pollution, they lead to changes in local economies and quality of life. What happens to urban neighborhoods once a nearby power plant moves elsewhere?

In a paper published in Environmental and Resource Economics, we explore how the relocation of two major power plants in a large Chinese city—Chengdu, the capital of Sichuan Province—led to significant improvements in the local housing market.

Two of the Chengdu’s oldest coal-fired plants, the Chengdu and Hua Neng plants, were originally located in the center of the city. The two plants contributed close to 6% of total inhalable particles in the city, as well as over 27% of total sulfur dioxide—a major pollutant produced by the burning of fossil fuels—in the air. In early 2006, the local government decided to relocate the plants to outside the city in order to reduce air pollution. As expected, it decreased significantly in the downtown area, especially around the plants’ former sites.

New apartment buildings were built on those sites and in surrounding areas. To understand how the closing of the two plants and the decrease in air pollution impacted the local housing market, we employed a difference-in-differences statistical model. We compared variations in both the prices and volume of housing transactions within five kilometers of the plant sites, relative to neighboring areas in the city center.

We found that housing prices and the number of new house purchases both increased significantly around the original plant locations compared to neighboring areas. The plant closings are associated with a 12%-14% rise in new house prices within 5 km of the plants vs. comparable areas farther away, and a 13%-31% increase in the number of new house purchases. More expensive houses saw even greater price increases. Overall, the estimated effect of the closures is estimated to have over a $50 million monthly impact on the local housing market in the first two years after the relocations.

What’s behind these changes? We believe that the improvement in local air quality after the plants’ relocation is the main driver. One indicator is the higher increase in housing prices (15%-23%) that occurred in the quadrant southwest of the plants’ original location, which experienced the greatest air pollution prior to the closures because the wind blows predominantly southwest in Chengdu. 

Other factors no doubt play a role, such as the improved views and reduced noise that result from eliminating large industrial facilities, as well the redevelopment of the area, including more local amenities and services. The area likely also became more attractive for developers to build higher-end apartments in general.

Our research provides evidence of how the relocation of power plants in China’s urban areas not only can reduce local air pollution, but also can lead to a booming new housing market. We look forward to further expanding our research by studying how the relocation of Chengdu’s power plants has also led to significant changes in other areas, such as in public health, labor supply, and economic productivity. We hope our research can be useful for policy makers and urban planners alike in better understanding how environmental sustainability can benefit China’s growing cities.

Manuel Hernandez is a Senior Research Fellow with IFPRI's Markets, Trade, and Institutions Division; Francesca Edralin is an IFPRI Communications Intern.

This work was supported by the Private Enterprise Research Center (PERC) of Texas A&M University, Fundamental Research Funds for the Central Universities of Sichuan University, the Youth Outstanding Talent Training Program of Sichuan University, and the National Natural Science Foundation of China.