Without a doubt, few people really want a major highway or an airport in their own backyard. It is quite clear that noise makes people avoid properties in certain areas. When real estate is being evaluated, it’s important to understand different kinds of noise, noise levels, and how these factors devalue property. Experts working in psychology and medicine (and the overlaps between the two) often conduct studies to understand the negative impact of noise on people, and this topic is also important when it comes to the value of real estate. When people have an issue with noise, they are expected to want a lower price or even reject the whole idea of buying real estate. The Center for Real Estate Studies (CRES), which is a Steinbeis Transfer Institute at Steinbeis University Berlin, has been examining the effect of noise on the value of residential real estate under the scientific supervision of Prof. Dr. Marco Wölfle.
The study focused on two different ways to ascertain possible devaluation: Opinion regarding noise in common rating publications and modeling the impact of noise using hedonic regression calculations.
People often find noise – the sum of all negative sounds – a major disturbance. It is multidimensional in nature and non-linear; people perceive noise unknowingly, consciously or subconsciously. Some consider it detrimental to their quality of life. When there are lots of people trying to sell real estate or cancel tenancy agreements in a regional residential market, offer rises and this can push down the price of the properties that are available to buy. It’s often more difficult to find buyers or tenants, usually because of the noise. When this has a long-term impact on yield, the returns on real estate can be low and this can result in a lower market value.
Four physical characteristics must be established to investigate which kinds of noise have to be assessed. First there is “acoustic pressure level.” This is perceived as volume and can be measured in physical terms simply by looking at sound pressure. Secondly, one can look at the pitch of a sound. People typically dislike high pitch sounds (high notes) more than low pitch sounds. Thirdly, the number of individual pitches (notes) perceivable within a noise can be described as the tonality. Sounds with more tonality are considered more of a nuisance than those with less.
Finally, individual notes with strong variations in the height of notes (pitch variation) are typically considered more of a nuisance than sounds that stay level or maintain the same volume. Measuring this factor is about “sound impulsiveness.” All of these four physical noise characteristics are particularly important from a legal perspective when it comes to assessing compensation for noise emissions. This involves “rating levels” – an objective figure is calculated, based on the strength of the different physical measurements, and this figure dictates the higher or lower monetary values.
To show an example of significant value fluctuations experienced in real estate plagued by noise, the experts at the Steinbeis Transfer Institute invented a fictitious apartment, a duplex, and a multi-family house. As a starting point, they looked at typical houses in the real estate market of Freiburg from the perspective of investors (people not wishing to use the properties themselves). Assuming that the property being evaluated is on a busy main road, it could be expected that a tenant would want to pay less rent. As a result, the research based their calculations on a formula used by Stege to assess reductions in gross yield (cf. Stege, J., ).
Compared to other methods for calculating devaluation, as well as looking at reductions in the value of land, one can determine expected reductions in rent. This makes it possible to ascertain the market value of real estate affected by noise. To do this, the Steinbeis experts made several adjustments to three influencing factors – the remaining duration of use, property interest rates, and the value of land – and this showed the relationship between earning power and individual factors. The only relevant changing factor within the formula was the distance between the front wall of the building and the road. The nearer a building stands to a road, the greater the negative impact on gross yield thus devaluing the earning power.
If one looks at the duration of remaining use for a building and extends this bit by bit, then there is an increase in the degree of devaluation although the level of this curve for individual properties does flatten. For a multi-family house, devaluation flattens out at 12.03%, for apartments it stops at 13.07%. The devaluation curve also rises if there are changes in property interest rates and this variable rises, although the impact of this is not as extreme as the remaining use of a building. For example, the curve for a multi-family house peaks at 11.20% at property interest rates of 1%, rising to 12.06% at 7.5% interest. This is thus much less than the curve for the remaining property duration (9.95% over 20 years, 12.03% over 80 years). As land values go up, the curve dips, although the negative incline is scarcely perceivable.
The modeling and calculations used in the Steinbeis study showed that the devaluation resulting from changes in property interest rates and land value works the same way. Changes in both factors have little influence on the level of devaluation. There are major effects in terms of devaluation when it comes to the remaining duration of use. Compared to property interest rates (1.56%) and land value (1.15%), the level of fluctuation relating to remaining use is more than double. The level of devaluation linked to the remaining duration of use is up to 3.94%. What is noticeable with these calculations is that the devaluation curves are between 10-13% for almost all factors. Of course, such calculations are sometimes disproportionate when it comes to real life scenarios. If other factors had to be included in the calculation of earning power, the results would become less and less accurate as the equations become more complex, and there could be overlaps between difference price factors.
This was not the case with the hedonic modeling used to assess the impact of noise. Most scientific discussion revolves around noise emissions resulting from road traffic and aviation noise. Above and beyond common evaluation methods, a number of literature sources work with hedonic regression models. These do no work out the impact of property characteristics on the value by looking at external criteria such as legal or medical issues. Instead, they use market data and look at numbers based on statistical estimation methods. The result is a more marketoriented and more up-to-date quantification of real estate factors influencing the value. When hedonic modeling is used to ascertain the value of real estate affected by noise, the devaluation effect is almost linear. Devaluation fuelled by road, rail, or aviation noise (exceeding 25 decibels) has a small impact on value of between 2.71% and 5.59%, being near a major highway (with at least two lanes in each direction of travel) has a significant impact on property value (just under 71%).
Other evaluations are being carried out by the Steinbeis experts to examine the impact of the remaining physical properties of noise. Not only does this involve investigating acoustic pressure levels, but also the pitch of sounds, the tonality, and sound impulsiveness. The aim is to show the different values that can come up in the calculations in order to make statements about the value of real estate.