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How do ADUs affect property values?

[This is part 5 of a 13-part series about accessory dwelling unit research and policy.  For the series intro and table of contents see here.]

Property values come up in every civic debate about whether local governments should allow ADUs.  Take, for example, this letter to the editor of the local paper in Durango, Colorado:

Real estate values will, in the long term go down, not up. People do not like and will not pay high prices for being crammed together. There may be short-term benefits if the proposal now before the council is adopted but in the long term, the overuse of utilities, lack of parking, increased noise, more garbage cans, overcrowding, etc., will most likely lower real estate values and the stability and desirability of the neighborhood.

Are those McMansions bringing down the little house's value?  (Photo by zen Sutherland, Creative Commons)

Are these houses affecting each other’s value? (Photo by zen Sutherland, Creative Commons)

The idea is that the presence of ADUs on the properties of your neighbors makes the whole environment denser and more urban, and thereby less desirable — which could affect the value of your property, even if you don’t have an ADU yourself.

Is there any evidence for ADU effects on neighborhood property values, for good or bad?  The short answer is no. There is absolutely zero research, as far as I can tell, on the specific relationship of these variables.

That’s no surprise because it would be a problematic topic to research.  Legal ADUs are rare enough as it is, and to find them and then study the property values of their neighbors, over years, all the while separating the “ADU effect” from the other things that affect property values, such as community economic conditions, interest rates, etc., would require a lot of work or a lot of cleverness or both. Imagine trying to separate the ADU effect, which would probably be small, from the dramatic effect of time on property value, as illustrated in a recent summary of the Case-Shiller Index:

Such complexities prevented me from studying “neighbor property value effects” in my recent interpretation of a survey of Oregon ADU owners.

However, I want to address the subject in this web post because property values are such a frequent concern in ADU debates.  My approach will necessarily have to  be indirect.  It will also inevitably have to tangle with philosophical issues.  Let’s blast through them here at the beginning to get them out of the way.

  • How is property value measured? In this discussion, property value is measured as the cash price the property would fetch on the open market.  This is the most common way of discussing property value, though it fluctuates a lot, and other, income-based measurements might be more stable, and credible.
  • What gives a property value?  In a typical urban or suburban setting, a large part of the property’s value comes not from the property itself, but from what is around it.  For example, an acre in Manhattan is worth more than an acre of a typical suburb.  If (silly hypothetical example here) a smelly neighborhood pulp mill were shut down and transformed into a park, nearby property values would probably go up.  If a neighborhood park were converted to a smelly pulp mill, nearby property values would probably go down.
photo of a new tract house with an immense water tower in background

Is that McMansion bringing down the water tower’s property value? (Photo by Dean Terry [Creative Commons] for the film Subdivided)

So, is a neighbor’s ADU more like a park or a pulp mill?  Because there were no papers on ADUs and neighborhood property values, I looked for research into similar neighborhood effects, especially the effects of “progressive” policies which tend to “densify” some areas while leaving others less developed.  ADUs are definitely a “densifying” strategy.  Excuse me for a moment as I get technical…

Nguyen (2005) reviewed a number of papers on the effects of affordable housing projects on nearby property values.  The results were mixed: some housing projects were associated with declines in nearby home values, others with no effect, and others with positive effects.  (That is, some affordable housing projects appeared to increase nearby home values.)  Negative effects were associated with highly concentrated affordable housing, and with neighborhoods that were already declining.  Neutral or positive effects were associated with dispersed affordable housing, and neighborhoods that were thriving for other reasons.  This is a cautiously optimistic piece of evidence for ADU advocates, because ADUs are, almost by definition, dispersed.

On a much bigger scale, Jaeger et al. (2012) looked at land values associated with Oregon’s land use system, which divides the state into urbanized areas where development is concentrated (inside UGBs, or urban growth boundaries) and rural ones (outside UGBs).   They found that over several decades, undeveloped land values had appreciated at roughly the same rate both inside and outside UGBs.  This, again, is a cautiously optimistic piece of evidence for ADU advocates.  There was no negative effect of densification.

Finally, the most relevant paper might be Song & Knaap’s (2003) examination of the impact of “New Urbanist” neighborhood features (such as high density of housing, smaller homes, proximity of shopping and transit, etc.) on home values.  The authors drew on both GIS and a database of home sale prices. After a regression analysis, they were able to estimate the price premium or penalty associated with individual New Urbanist neighborhood features, compared to the features associated with the more standard “sprawl” type of development.  Though ADUs were not specifically part of the analysis, ADUs were permissible in much or all of the study area, including all of the New Urbanist area, and ADUs are definitely part of the New Urbanist programme.

The results are really interesting, because they show that, in a way, ADU opponents could be right about the effects of density, but wrong about the total effect.  Considering density by itself, home values were slightly lower in denser settings.  Homes in the New Urbanist areas, which were denser, suffered a price penalty on that basis.  BUT (and this is a big big but) many other factors associated with New Urbanist type neighborhoods, such as smaller blocks, better connectivity to areas outside the neighborhood, and nearby shopping, commanded a premium that more than made up for the density-related penalty.  Over all the factors, the New Urbanist homes had higher prices — about $24,000 more, given a standard of about $150,000.  (Note these prices are from more than a decade ago.)

song-knaap-selected
Together, these three papers suggest that the author of that letter in Durango doesn’t quite have it right.  People will actually pay a premium for (to use the author’s words) “being crammed together,” if it’s done in the right way.  That’s not because they enjoy having more garbage cans in the neighborhood.  It’s because they like the good aspects of a denser built environment.

The evidence so far is indirect, but it merges into a fairly coherent three-part suggestion.

  • ADUs seem less likely to have a positive effect on nearby property values if placed en masse into standard, unaltered, “suburban sprawl” (not that doing so is a common suggestion in planning circles).
  • ADUs seem most likely to have a positive effect (or positive association) with nearby property values if they are added to neighborhoods that have (or are acquiring) New Urbanist qualities, such as small blocks, stores within walking distance, availability of transit, etc.  In such places, ADUs should contribute to the density that helps New Urbanism work, and thereby form part of a “New Urbanist premium” to home prices.
  • As a corollary, illegal ADUs seem less likely to have a positive association with nearby property values, because besides being unpermitted and “under the radar,” and thereby harder to value, they are created without any purposeful connection to existing services, geography, etc.

To sum up in a less technical way, I’d say that when it comes to ADUs and property values, “how it’s done” matters.  When ADUs are a part of a coordinated development strategy that includes compatible civic features, the fear about declining property values should have little basis.  It’s too early to make big promises, but there might even be a small investment opportunity there. :)

next week: are ADUs “green” housing?

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About Martin John Brown

Martin John Brown is a researcher and consultant on environment and housing. Find out more at http://martinjohnbrown.net.

6 comments on “How do ADUs affect property values?

  1. Pingback: Research and policy about accessory dwelling units: introducing a 13-part series | Accessory Dwellings

  2. Pingback: Are ADUs green housing? | Accessory Dwellings

  3. Pingback: How much do ADUs cost to build? | Accessory Dwellings

  4. kolpeterson
    July 30, 2014

    It would be worth investigating tenure length of ADU owners. Due to the economics of ADU ownership, I wonder whether ADU owners tend to hold on to their properties for longer than the average residential property owner. And, I also wonder whether ADU owners tend to care for/maintain their properties better than the average residential property owner since the house/ADU is both a rental property AND a primary residence. This inherent long term commitment to a property may actually help maintain the value of the property better than the average property.

  5. Martin John Brown
    July 30, 2014

    My feeling, based on comments to the Oregon DEQ survey, is that most ADU owners are in it for the long haul, and that’s a good thing. Economically, that should be the right impulse for them on a personal basis, because currently, the investment return from keeping an ADU and renting it out is far better than just building one and re-selling the property (http://accessorydwellings.files.wordpress.com/2012/12/appraisingpropertieswithadusbrownwatkinsnov2012.pdf ). You are likely to make money the first way, and (at least right now) probably lose money the other way.

    As far as maintenance goes, you have an interesting hypothesis there. I could believe it. In my personal case I know that I tend to take better care of the ADU than my own house (wouldn’t want a mad mother-in-law :) ).

  6. Pingback: Do ADUs provide affordable housing? | Accessory Dwellings

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This entry was posted on July 2, 2014 by in Financing, Policy & Trends and tagged , , .
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