This thesis investigates the implications of the Prostitution Control Act 1994 on Melbourne's brothel industry to determine the extent to which the law change fulfilled its principle objective to "lessen the impact on the community and community amenities of the carrying on of prostitution-related activities". In an effort to achieve this, the Victorian government introduced a licensing scheme which required brothel operators to obtain a brothel license as well as a planning permit in order to operate legally. Also, the new Act placed a size constraint on the size of brothels, where brothels commencing business after the law change were not permitted to operate with more than six working rooms. To assess the effectiveness of these changes in countervailing the adverse impact of brothels on nearby communities, the first research problem estimates the impact of brothel businesses that commenced operation before the initiation of the law change on nearby property values over the pre-law change period. Having determined this, the second evaluation problem tackles the main policy question, that is, whether or not the introduction of the brothel licensing system and size restrictions was effective in lessening the adverse effects of brothels on property values.
To ascertain this, we firstly estimate the impact of brothels that entered the industry after the law change was implemented on nearby residential properties. We then use properties proximate to brothels that were in operation in both the pre-law and post-law periods to determine the law change impact. The impact of a brothel business is estimated with a hedonic regression on samples constructed using the propensity score method and the revealed-preferences method. Findings reveal that the value of residential properties proximate to a brothel that commenced operation before the law change was introduced were significantly less than control properties over the pre-law change period. However, after the law change was implemented, brothel impact was insignificant. Findings also show that brothels that commenced operation after the law change was introduced imposed no statistically significant impact on nearby property values. In effect, the results reported in this thesis suggest that the law change was successful in negating the adverse spill-over effects of brothel businesses on nearby residential property values. These findings are consistent with the objectives set out in the Prostitution Control Act 1994.