Conjoint Analysis : Assessing Buyer Preferences for Property Attributes to Assist with the Estimation of Land Contamination Stigma

The traditional approach to property valuation that dominates valuation theory and practice in Australasia is the Sales Comparison Approach. However, the approach relies heavily on the availability of comparable sales price data and the ability of the valuer to adjust these for differences in property attributes between the comparable and subject properties. A plentiful supply of sales price data greatly assists the task of determining how each of these attributes contributes to price but in circumstances where comparable sales price information is scarce, as is often the case for contaminated property, other information sources are required to achieve this. One option open to valuers faced with a scarcity of comparable sales data is to find out directly from the buyers what their preferences are for particular property attributes. Knowing how important each property attribute is to buyers enables the attribute to be correctly weighted in the valuation process. This paper summarizes the results of a study that uses conjoint analysis, a survey-based technique, to determine the importance of land contamination and other relevant property attributes in purchasers' buying behaviour of remediated residential land. From the results, the extent that "stigma" should be taken into account in valuations of post-remediated residential property was ascertained. 1 “Stigma” is the blighting effect on property value caused by perceived risk and uncertainty. Uncertainties relate to negative intangible factors such as: the inability to effect a total "cure"; risk of failure of the remediation method; risk of changes in legislation or remediation standards; difficulty in obtaining finance, or simply, a fear of the unknown. Post-remediation “stigma” is the residual loss in value after all costs of remediation, including insurance and monitoring have been allowed for. 3 Brief Literature Review "The basic concept that perceptions of risks can affect market value of once-contaminated property is reasonable. Quantifying the effect of those perceptions in particular cases, however, is not always straightforward", (Elliot-Jones, 1995). Due to the significance of risk perceptions in the valuation of contaminated property this section reviews the literature dealing with approaches to measuring risk perceptions and discusses the effect these have on contaminated property values. The review incorporates a discussion of the theories underlying these approaches that come from various academic disciplines including finance, economics, marketing, and psychology. Further, it provides the rational for focusing on the behavioural approaches to risk analysis in this paper. By way of introduction, a brief discussion of risk perceptions from the social scientists’ viewpoint is presented first. Social Theories of Risk According to Golding (1992) risk research was first legitimised as an academic endeavour in the US with the passage of legislation in the early 1970’s relating to environmental protection, with funding for it becoming available from agencies such as the Environmental Protection Agency. It was in 1979 that the Technology Assessment and Risk Analysis (TARA) program set the directions for the boundaries of risk research. Subsequently, it was at the first annual meeting of the Society for Risk Analysis that found that the public It equates to the difference in value between a remediated contaminated site and a comparable “clean” site with no history of contamination. 2 Including both currently and previously contaminated property. 3 The research reported in this section is referenced primarily from Krimsky and Golding (1992). 4 perceptions of risk differ markedly from expert assessments and this formed the basis for much of the risk research since then. Krimsky and Golding (1992) explain that the divergence in views of risk is in part due to the influence on risk policies from the field of economics. The economists’ view of risk is based on expected utility theory that comprises a set of decision rules that define rational behaviour. It assumes people will follow these rules if they have sufficient information and time to dwell on the consequences of alternative decision paths. Krimsky and Golding, however, suggest that the public’s perception towards risk will vary according to a wide range of variables including voluntariness, catastrophic potential, dread etc. This view, which departs from the view that risk may be reduced to a common metric, is based on “cognitive theory” of how people think and reason. This theory shows that risk decisions are made on the basis of multiple attributes that describe the risk event. It has been the driving force behind risk communication research and has become enshrined in laws such as the Superfund Amendment and Reauthorization Act 1986 (SARA). A number of the studies have been conducted to help understand these divergent views of risk, and a selection of these is presented next. In a study of risk perception Kunreuther (1992) contrasted two models of choice: expected utility theory (economics) and sequential model of choice (principles of bounded rationality). He found that individuals have a hard time dealing with the concept of probability and tend to rely on salient information (past experience) and easily accessible sources (friends and neighbours) rather than utilising statistical data and making tradeoffs between costs and benefits. Further, he found that people use rules of thumb (heuristics) that enable them either to disregard the possibility of a disastrous event or cause them to show disproportionate concern about the