The Effect of Legalizing Retail Marijuana on Housing Values: Evidence From Colorado

Abstract

Does legalizing retail marijuana generate more benefits than costs? This paper provides a first step toward addressing that question by measuring the benefits and costs that are capitalized into housing values. We exploit the time‐series and cross‐sectional variations in the adoption of Colorado's municipality retail marijuana laws (RMLs) and examine the effect on housing values with a difference‐in‐differences strategy. Our estimates show that the legalization leads to an average 6% increase in housing values, indicating that the capitalized benefits outweigh the costs. In addition, we find suggestive evidence that this relatively large housing value appreciation is likely due to RMLs inducing strong housing demand while having no discernible effect on housing supply. Finally, we show that the effect of RMLs is heterogeneous across locations and property types. (JEL K20, R28)

Contact High: The External Effects of Retail Marijuana Establishments on House Prices

“…To identify the effect, they use variation in time of adoption of Amendment 64 by municipalities along with municipality and time fixed effects. Even though the amplitude of the effect on house prices they document is still positive, but slightly smaller than our findings, Cheng, Mayer and Mayer () cover larger and more heterogeneous areas. In contrast, our study focuses on one city in Colorado (Denver).…”

“…In contrast to the documented positive effect of retail marijuana on residential property values, Billings, Johnson and Villupuram () documents a negative spillover effect of legal marijuana business establishment on commercial rents in the near vicinity in Denver. This very localized effect on nearby commercial space is not necessarily incompatible with the positive effect on housing prices documented in Cheng, Mayer and Mayer () and this article for various reasons. First, Billings, Johnson and Villupuram () deal with the spillover effect on commercial properties, whereas we are examining residential properties.…”

“…But in a parallel study, Cheng, Mayer and Mayer () explore the effect of retail marijuana legalization in Colorado on house prices at the municipality level. Using a difference‐in‐differences approach, Cheng, Mayer and Mayer () document a 6% increase in housing values on average in municipalities that allow retail marijuana sales. To identify the effect, they use variation in time of adoption of Amendment 64 by municipalities along with municipality and time fixed effects.…”

“…While at first glance this estimate may seem large, our results are very much in line with existing research concerning the external effects of RML. In a related paper, Cheng, Mayer and Mayer () find an approximately 6% increase in house prices for municipalities in Colorado that adopted RML. Whereas Cheng, Mayer and Mayer () are looking at a municipality level effect, our analysis is more micro in nature.…”

“…In a related paper, Cheng, Mayer and Mayer () find an approximately 6% increase in house prices for municipalities in Colorado that adopted RML. Whereas Cheng, Mayer and Mayer () are looking at a municipality level effect, our analysis is more micro in nature. We are measuring the effect of an existing store's conversion to retail on local property values.…”