Urban housing demand, permanent income and uncertainty: Microdata analysis of Hong Kong's rental market

Abstract

The sensitivity of housing demand to income changes has important implications for the evolution of housing affordability and the behavior of urban households. In Hong Kong, investigations into this issue have shown the increasing importance of the private rental housing market, which is regarded as suboptimal and to contribute to gentrification and inequality problems. Using microdata from four waves of Hong Kong census data between 1996 and 2011, this paper aims to estimate the income elasticity of demand for private rental housing. A permanent income model was adopted to isolate permanent income and transitory income at household level. Then, the Heckman two-stage procedure was used to correct selection bias and the quantile regression (QR) approach was used to investigate the heterogeneity of demand elasticities across different tiers of housing expenditure. The empirical results showed that the permanent income elasticities fell within a range of 0.536–0.698 and transitory income shock had a positive and significant impact on the demand for rental housing. Moreover, a U shape of permanent income elasticity across the whole distribution of housing expenditure was revealed. Households in both the upper and lower tiers were more sensitive to permanent income changes, with the higher tier of households being more sensitive to transitory income shocks. These findings not only shed light on the long-term movement and cross-sectional heterogeneity of housing demand in the private rental housing market, but also have implications for studies of the rental housing demand in other developed cities.