Does marijuana legalization really drive house prices?

by Michael Mata03 Oct 2016
Could housing prices in the San Francisco Bay Area increase even further if recreational marijuana is legalized this November? According to a new study released by academics from the University of Mississippi and software technology company FNC Inc., the answer could be yes. 

The study notes that there was an average 8% increase in housing prices in Colorado counties that legalized retail marijuana in November 2012. In contrast, Colorado counties that did not legalize retail marijuana failed to see a similar increase.

“Our estimates show that on average legalizing retail marijuana in Colorado increases housing values by approximately 8 percent, or $20,000 per property, which can explain about 36 percent of the overall housing price appreciation in adopting municipalities during the examination period,” noted the study. “This net positive effect indicates that the benefits of RMLs [retail marijuana laws] that are capitalized into housing values outweigh corresponding costs.”

Cheng Cheng, assistant professor of economics at the University of Mississippi and co-author of the study, said that the significant increase in housing prices is due to the boost in housing demand following the legalization of retail marijuana (i.e. more home buyers are attracted to such areas).

Housing supply is restricted because more existing homeowners are discouraged from selling their homes and moving away. “The combined effect caused considerable housing value appreciation,” said Cheng.

If housing market participants in Colorado and California are similar in terms of how they view the costs and benefits stemming from the legalization of recreational marijuana, housing prices in California could see a comparable increase should Proposition 64 pass on November 8, 2016.

Aside from California, four other states will decide if recreational marijuana will be legalized in their jurisdictions. Cheng said it was “very reasonable” to think that the legalization of recreational marijuana in more states could possibly dampen the increase in housing prices witnessed in Colorado. However, more data would be needed to test this hypothesis.

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