Air Pollution and Negative Housing Premium in Korea: Incorporating Transboundary Pollution Spillovers from China

In this study, we estimate the degree and scope of PM2.5-induced negative price shock in Korea’s local housing markets, taking a 2SLS hedonic approach. For the analysis, we constructed a 5-year panel data set of Korea’s 110 city and county level municipalities between 2012 and 2016, and instrumented inverse distance-weighted, wind direction-aligned PM2.5 levels in 260 Chinese prefecture-level cities to consider the long-range transport of air pollutants. We find a PM2.5 elasticity of housing price of -0.36 for the period analyzed, suggesting that, on average, a 1% PM2.5 level increase in a Korean city or county is associated with a 0.36% decline in local residential property value. Transboundary pollution has significant effects on Korea’s local PM2.5 levels, showing an elasticity of 0.05—a unit % increase in PM2.5 levels in China’s major cities exacerbates Korea’s PM pollution by 0.05%, accounting for a comparable share of the PM-caused negative housing premium. Compared to the national average, PM2.5 elasticity with respect to housing price is 22–25% higher in Seoul and its vicinity, which is more vulnerable to transboundary pollution than the rest of Korea.