The Stock Demand Elasticities of Non-Farm Housing

Abstract

H OUSING demand is a major factor in determining national income via private residential capital formation. Moreover, it fluctuates so widely, in many cases independently, in comparison with the demand for other consumer goods that it has been the focus of considerable attention on the part of economists. Yet there are markedly different opinions about the basic relationship of housing demand to changes in income or prices. As early as 1857, Engel made the first classic study of the relationship of family expenditures to income based on budget data; among other things, the percentages of housing to total expenditure were roughly estimated for three different socioeconomic groups. Later, Wright interpreted these estimates to mean that housing expenditure for lodging or rent takes a constant percentage of income at all levels of income. This is known as one of Engel's laws of consumption. However, Schwabe in 1868 presented empirical evidence that the percentage of income spent on rent falls as income rises.1 On the other hand, Marshall in his theoretical analysis, viewed housing as a means of obtaining social distinction as well as shelter, and said that where the condition of society is healthy, and there is no check to general prosperity, there seems always to be an elastic demand for house room, on account of both the real conveniences and the social distinction which it affords. 2 With these views Marshall seems to distinguish himself from his predecessors by stating that the demand for housing is rather elastic with respect to income. In recent years further controversy based on various empirical evidences has arisen. These dissimilar findings have led to radically different implications for important issues in the field of housing such as residential capital formation and the incidence of property taxes. Morton arrived at an income elasticity of demand of around 0.6 for the value of a house purchased, using cross-section data. Combining his estimate with the view that the property tax rate is constant over the different levels of property value, Morton concluded that the property tax was regressive.3 Winnick similarly derived an income elasticity of demand for the value of a house purchased of about 0.5, and noted a downward trend in per capita residential housing stock since 1900 (observed by Grebler, Blank, and Winnick) when real income was rising. Combining these with the assumption of a low price elasticity for housing, Winnick concluded that there had been a downward shift in consumer preferences for residential capital formation since around 1900. Recently Muth presented an intensive study 6 of stock demand elasticities for housing in which he rejected Morton's conclusion, stating that the income elasticity of demand for housing is about unity; i.e., more elastic than what Morton estimated. The price elasticity for housing stock estimated by Muth also exceeded unity, differing substantially from Winnick's contention. In view of high elasticities with respect to both income and price Muth cast doubt on