Court File No.

12023/01 Ontario SUPERIOR COURT OF JUSTICE B E T W E E N: WILFRED ROBERT PEARSON Plaintiff - and INCO LIMITED, HER MAJESTY THE QUEEN IN RIGHT OF ONTARIO, THE CORPORATION OF THE CITY OF PORT COLBORNE, THE REGIONAL MUNICIPALITY OF NIAGARA, THE DISTRICT SCHOOL BOARD OF NIAGARA, and THE NIAGARA CATHOLIC DISTRICT SCHOOL BOARD Defendants Proceeding under the Class Proceedings Act, 1992

AFFIDAVIT OF FRANK A. CLAYTON I, Frank A. Clayton, of the City of Toronto, MAKE OATH AND SAY: 1. I am President of Clayton Research Associates Ltd., a firm specializing in urban

and real estate economics that I founded in 1972. My academic background includes a Ph.D in economics, and I have 35 years of experience working in the area of urban and real estate economics. Over this time, I have been involved with many real estate market and economic impact studies and analyses. A copy of my curriculum vitae is attached as Exhibit A. 2. I provide this affidavit in order to comment on the nature of the process that

would be necessary to determine what economic losses (or gains), if any, individual property owners incurred as a result of the possible effects of the operation of Incos Port Colborne refinery on property values in Port Colborne. I have overseen the assembly of the data and scholarly literature that is discussed below. I have knowledge of the matters to which I depose in

-2this affidavit, except where I have been advised of such matters, in which case I believe such information to be true. 3. The City of Port Colborne, according to the Census of Canada had a population of

18,450 persons in 2001, which has been stable for at least 15 years. From my review of the background materials in this case, I understand: (i) that Inco began to operate a large nickel refinery in Port Colborne in 1918 which for many years was one of the largest employers in Port Colborne, at times employing almost 3,000 people; (ii) that since 1984 the scale of operations at the refinery have been reduced substantially; (iii) that elevated levels of certain metals have been measured in Port Colborne soils to varying degrees and that such levels are, to some extent, the result of the deposition of airborne emissions associated with historical operations at the Inco refinery; (iv) that a Community Based Risk Assessment (CBRA) is now underway in Port Colborne under the auspices of the City, the Region of Niagara and the Ministry of the Environment; and (v) that the object of the CBRA is to determine and carry out whatever property remediation is deemed necessary in Port Colborne to the satisfaction of these regulatory authorities. 4. As I describe below, the process for determining whether, and the extent to which,

individual property owners in Port Colborne have suffered economic losses as a result of possible effects of Incos refinery on property values is an extremely difficult one that is inherently a property-specific and owner-specific inquiry.

-3Factors Influencing Residential Property Value 5. A home has many attributes. The market value of a home at any given point in

time depends on the value that the market places at that point in time on the unique package of attributes that the home may have. These attributes can include: house and lot size and configuration whether the home has a garage and its size the number of bedrooms, bathrooms and fireplaces the availability of a pool the homes age and condition any renovations and their age and quality incomes, size and quality of houses in the neighbourhood maturity of vegetation and trees on the lot and in the neighbourhood proximity to employment, shopping, airport, expressways, transit, and community facilities like parks property tax rate crime rate in the neigbourhood proximity to traffic, rail or airport noise and air or land pollutio n public perceptions about any or all of the above 6. In addition, the market values of homes in a given urban area at a given time are

dependent on overall economic and housing market demand and supply conditions. Investigating Property Value Impacts of Environmental Contamination 7. Because of the complex set of factors that contribute to a particular homes value

at a given point of time, community-wide studies about allegedly widespread property value

-4impacts are not capable of reliably determining the quantitative impact of a particular condition on the value of any individual home. A close examination of an individual property in question is necessary to determining whether and to what extent particular factors affect that homes value. The best that can be achieved by a macro- level study is a rough estimation of the

approximate order of magnitude of average property value effects at a fixed point in time. 8. Even such an estimation is subject to enmeshed variables the effect of which can

be difficult or impossible to isolate. For example, in heavily industrialized areas where there are likely multiple contributors to environmental contamination over an extended period of time, it would difficult to estimate even the general effect of any single contributo r. 9. In addition, where an environmental condition is linked to a major employer in a

given urban area which has significantly reduced its employment over time, it is difficult to attribute and calculate property value impacts of that condition separate from the impacts of the job losses on property values. 10. In the case of Port Colborne, Mr. Kaufmann alleges in his affidavit that a public

announcement about contamination in September 2000 was a distinct event that significantly affected property values. As I discuss further below, property value impacts of public

perceptions are often very time sensitive. With time and/or further information, perceptions change. 11. Nevertheless, to provide insight into Mr. Kaufmanns hypothesis, unit sales and

price information for several Niagara Region municipalities was accessed from the Multiple Listing Service (MLS) of the Niagara Association of Realtors. Sales of residential properties excluding income-producing properties and residential land sales were compiled. The MLS sales data do not include every residential sale. Excluded are sales of residential properties listed

-5exclusively with a single realtor and private sales. However, MLS typically incorporates a majority of sales and is a useful database for identifying and assessing overall residential market trends. 12. Figure 1 (attached as Exhibit B) shows the residential sales (units) and average

sales prices for Port Colborne and three nearby urban municipalities Welland, Fort Erie and Niagara Falls - in the Region of Niagara for the years 1998-2001. If the public announcement of contamination in September 2000 had a noticeable effect on residential property sales and prices, it would be expected that there should be a conspicuous variation in the 2001 sales data for Port Colborne compared to preceding years and compared to the other municipalities in the Region of Niagara. 13. However, the number of new home sales in Port Colborne in 2001 (186 homes)

was quite similar to the sales in each of the preceding three years. The average sales price in 2001 ($105,632) was higher than in any of the preceding three years. Similarly, the patterns in sales and average prices in Port Colborne in 2001 from the year 2000 are not conspicuously different from those in Welland, Niagara Fa lls or Fort Erie. 14. To allow for the possibility that the annual MLS data might mask market changes

attributed to the public announcement in September 2000, monthly data have also been compiled and reviewed in Figure 2 (attached as Exhibit C). When making shorter period comparisons from year to year, it is important to compare the same monthly periods since there is considerable seasonal variation in MLS activity through the year. The examination of Port Colborne sales and price data for the 11 months prior and after September 2000 indicates that sales were marginally lower in the 11 months beginning October 2000 but that average sales price increased. Again this pattern is not noticeably different from the patterns in the other three

-6municipalities surveyed. The same is observed looking at the lastest post-September MLS data available after September 2000: the four months starting in October 2000 and in October 2001 and comparing these to the same periods in the two years prior to September 2000. 15. Thus a review of these data does not support the view that the overall residential

property market in Port Colborne was significantly affected by the public announcement concerning contaminants in September 2000. While this does not rule out the possibility that a particular property suffered a property value impact as a result of the announcement, it does reinforce the conclusion that a case-by-case assessment is unavoidable if one is to attempt to estimate the existence and extent of any such impact on individual properties. Property Value Impact Versus Economic Loss or Gain 16. Even if one were able to ascertain the property value impact of environmental

contamination from a particular source on various individual properties, one must still engage in a very careful case-by-case assessment to determine the actual economic effect, if any, on individual property owners. 17. Property values impacts are estimated at given points in time. But property values

change with time and, as discussed below, impacts have been shown to be especially temporal where large-scale remediation of a environmental condition is undertaken, a process which is underway in Port Colborne. 18. Economic losses or gains to individuals are not necessarily the same as property

value impacts. They can diverge depending upon when a property owner bought, sold and/or refinanced his home and the knowledge or perception concerning the environmental condition of the parties at the time of the transaction. For example, to the extent the price paid for a

-7residential property factored in environmental considerations and was lower than it otherwise would have been, the current property value impact will not be equivalent to economic losses. For most property owners, it would be a complicated task to separate ou the effects of the t environmental condition on property values at the time the properties were purchased. 19. As a result, a case-by-case assessment is unavoidable in order to determine the

existence and extent of any possible economic losses or gains exper ienced by individual property owners caused by the environmental impact of the Inco facility in Port Colborne. Property Value Impacts and Remediation 20. To the extent there are property value impacts resulting from the existence of a

facility that has been shown to be the source of environmental contamination, the magnitude of the impacts are sensitive to the status of the facilitys operation, e.g., whether it is still active, cut back or closed, and whether pollution-reducing measures have or are anticipated to be undertaken. Property value impacts thus should be sensitive to community-wide remediation initiatives such as the process that is underway in Port Colborne at the present time. There is scholarly evidence showing that remediation measures can have a pronounced effect on countering any negative property value impacts. 21. Dale, Murdoch, Thayer, and Waddell in the late 1990s undertook a

comprehensive study of residential property impacts before, during, and after the closure of a 50year old lead smelter west of downtown Dallas, Texas. A copy of the study, Larry Dale, James C. Murdoch, Mark A. Thayer, and Paul A. Waddell, Do Property Values Rebound from Environmental Stigmas? Evidence from Dallas, Land Economics, May 1999, is attached as Exhibit D.

-822. The study concluded that while residential property values around the smelter

were negatively affected when the smelter operated relatively uncontrolled up to 1981, . . . the prices of residential properties rebound after the stigmatized location is cleaned up (p. 325). The authors recognized several implications of the study, including: First, cleaning up hazardous waste site generates substantial benefits to nearby residents; and Second, the present value of the damages of stigmatised locations cannot be calculated by examining pre-cleanup price differentials. Price rebound limits the damages in the time dimension. 23. I believe this study is a competent piece of carefully done work. The results are

consistent with economic theory and the findings of previous studies. The results demonstrate the time dependency of property value impacts where remediation is undertaken. 24. Furthermore, the results strongly suggest that when community- wide remediation

takes place such measures can be very effective in eliminating property value impacts from a source of environmental contamination.

SWORN BEFORE ME at the City of Toronto on March 20, 2002. Frank A. Clayton, Ph.D Commissioner for Taking Affidavits