A Spatio-temporal-similarity and Common Factor Approach of Individual Housing Prices: The Impact of Many Small Earthquakes in the North of the Netherlands

This paper contributes to the literature on the explanation of housing prices and the impact of many but small induced earthquakes due to gas extraction in several ways. First, our proposed methodology accounts for both local spatial dependence and common factors, also known as weak and strong cross-sectional dependence, using individual data of more than 200,000 transactions in the three most northern provinces of the Netherlands over the period 1993-2014. Second, the selection of houses within each focal house’s submarket is, in contrast to previous studies, not only based on distance and time, but also on their degree of similarity. Third, we control for both non-observable and observable common factors, among which are respectively economic business cycle effects and population decline. Fourth, we accumulate the strength and frequency with which earthquakes affect each focal house before it was sold into one single measure using a seismological model and then subdivide it into different segments so as to be able to account for non-linear effects and to determine a threshold below which they have no effect. Using these techniques, we are able to investigate the propagation of the detrimental impact of earthquakes on housing prices over space and time without the need to select reference areas in advance, which potentially might also have been affected by earthquakes. It is found that housing prices started to decrease by 3.0% in 2009, by 5.2% in 2012, the year in which the heaviest earthquake occurred up to now, and finally by 9.3% in 2014.