Andrew Leigh is an amazingly active economist and does work of real social value. The current Economic Record has a piece by Andrew and his colleague Ian Davidoff where he values public school education in the ACT by looking at the effects of better than average test scores on house prices. A preprint of the whole paper is here.
I have a question for Andrew. If you get an education benefit from locating in a suburb that provides access to better-than-average public schools that means that house prices should rise to internalise that benefit. But doesn't it also mean that house prices should subsequently grow more slowly to account for the non-residential benefit? For example suppose real estate is increasing at 7% per annum on average everywhere. If you get some education benefit from living in a living in a particular location (say it is worth 2% of the value of the house) doesn't arbitrage mean that house prices should grow at the slower rate 7%-2% = 5%.
I wonder about this because I observe house prices in suburbs like Kew and Balwyn in Melbourne. The prices of these houses are high partly because they are very near good public and private schools. My theory suggests rates of capital appreciation should be slower in these suburbs - a prediction at variance with the facts. These suburbs are galloping away in terms of rates of capital accumulation.
Am I confused? I have asked many people about this over the years and remain none the wiser. The best discussion I had on the topic was with Ted Sieper a decade ago - he was adamant that prices in suburbs offering education benefits should grow more slowly than the market as a whole.