The Capital Expenditure for Owner-Occupied Housing: A Study of Determinants

Abstract

B ECAUSE of their heavy impact on the total economy, there is wide and continuing interest in consumer expenditures on housing. Such interest has stimulated a considerable amount of research in attempts to identify and evaluate the key determinants of these expenditures as a basis for deeper understanding and improved prediction. Much, if not most, of the research has consisted in an examination of the nature and strength of the relationships between the typical household's economic-demographic characteristics and its housing expenditures. detailed summary of such research is beyond the scope of this paper, but in general these studies suggest that family housing expenditures are positively and independently related to income, educational attainment, job status, and owner occupancy, while negatively and independently related to family size. There is also broad agreement among these studies that housing expenditures with respect to income are markedly inelastic, although analyses by Reid and Muth utilizing permanent rather than income suggest elasticities as high as 2.0.1 Despite these relationships, however, it is significant that attempts to bring them together into a dependable predictive model of housing expenditures through multivariate analyses have not been successful. Such results may be more reflective of the inadequacies of the methodology employed than the underlying reality. Virtually all of the studies have defined housing expenditures in terms of the monthly outlay (flow) rather than the purchase of a capital asset (stock), and such an approach has several deficiencies. While a figure for the rent is simple to obtain from the respondent, its interpretation is difficult inasmuch as it may include payment for the use of equipment, furnishings, and services in addition to space, and many analyses in this field were done while some units were under rent control. Furthermore, the conversion of owner-occupied housing expenditures to rent equivalents presents insurmountable obstacles. Finally, and most important, the monthly rent or its equivalent may not be the relevant concept for understanding consumer behavior since the current housing expenditure of any family is the product of a decision made at some time in the past rather than a reflection of its current needs and resources. One would expect, therefore, the relationships between a * This article is based on the author's unpublished doctoral dissertation entitled, A Statistical Comparison of Recent New and Used Home Buyers, University of Chicago, December, 1963. t Assistant dean and professor of marketing management, College of Business Administration, University of Notre Dame. 1 See Margaret G. Reid, Housing and Income (Chicago: University of Chicago Press, 1962), and Richard F. Muth, Demand for Non-Farm Housing, The Demand for Durable Goods (Chicago: University of Chicago Press, 1960).