Losses of Residential Utility from Budget Constraints on Preferences for Homes

Abstract

Budget-constrained residential preferences differ from unconstrained residential preferences if residents mentally devalue unaffordable attributes’ levels of available homes in comparison with affordable ones. Budget-constrained and unconstrained utilities of 70 recent-mover respondents in Saskatoon SK in 1987 and 74 inner-city respondents in Windsor ON in 2020 are quantified for 12 generic attributes of homes in conjoint choice experiments. Budget constraints on their utilities for homes’ attributes’ levels are operationalized by superimposing marginal implicit prices from a hedonic housing price model in each city. Residential utilities are then statistically compared both through time and for subsamples within full samples, and losses of utility are predicted. Respondents will experience an approximate one-quarter and one-tenth loss of possible utility for a home in Saskatoon and Windsor, respectively, if they cannot afford their unconstrained most preferred attributes’ levels. Losses of utility are predicted even though budget-constrained utilities of subsamples of respondents are higher as hypothesized for affordable levels of four attributes, and lower for unaffordable levels of those attributes. In conclusion, theoretical and practical implications of these predictions of losses of residential utility are discussed for residents, housing providers and policymakers.