Getting high or getting low? the external effects of coffeeshops on house prices

In recent years, the attitude towards cannabis consumption has changed around the globe. Many countries have started to decriminalize, tolerate, and even legalize cannabis consumption. Cannabis REITs have been all the rage in Canada and the U.S., but there is only limited scientific evidence about the potential effects of toleration and legalization of cannabis on the direct real estate market.

In a recent study, published in Real Estate Economics, we explore the effect of coffeeshops – Dutch cannabis sales facilities – on house prices. We make use of changes in house prices around coffeeshop after closings -- we observe a policy intervention that resulted in nearly random coffeeshop closings. A few years ago, the mayors of three big cities in the Netherlands (Amsterdam, Rotterdam, The Hague) decided that coffeeshops nearby schools had to close, protecting children from exposure to soft drugs. This controversial policy resulted in many coffeeshop closings. To compare apples with apples, we contrast house prices nearby closing coffeeshops with house prices of remaining coffeeshops.

Surprisingly at first, we find negative effects of closing on house prices. The effects range from -1.6 to -8.5 percent and decrease with distance. Put differently, houses very close to closing coffeeshops decrease up to 8.5 percent in value compared to houses very close to remaining coffeeshops. However, a view in the literature reveals complementary findings for similar sales facilities’ openings in the U.S. (values of homes actually go up!). We find the effects to be robust to many tests. One potential explanation of the effects could be the post-closing usage of the former coffeeshop location. We know from other studies on retail activities that vacancy is usually disliked by residents, signaling a lower value of the area. Therefore, we visited all former coffeeshops and researched the post-closing activities of the building. After classifying the new activities (e.g. shisha bar, restaurant, etc.), we test again, differentiating for the different post-closing uses. However, our results do not show specific differences for certain locations or vacant sides.

Our results show that coffeeshops or similar cannabis sales facilities might not be perceived too badly in the neighbourhood. Considering the literature on other facilities, the effect of coffeeshops cannot be compared to those of pubs, bars, or liquor stores, per se – these “amenities” may lead to stronger negative effects. These insights are useful for future policy decisions on the location of similar facilities and potential (positive) effects on the neighbourhood. Regarding the underlying policy intervention (the distance criterium), our results suggest that indirect costs were actually high and distributed unequally among residents. We therefore assess the outcome of the policy critically, as earlier studies already suggested no effect on the consumption behaviour of teenagers.

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