Income Elasticity Of Demand For Housing Research Articles

Responsiveness of sub-divided unit tenants’ housing consumption to income: a study of Hong Kong informal housing

This is the first empirical study of income elasticity of housing demand of low-income households living in sub-divided units (SDUs) of Hong Kong. Housing affordability is commonly measured by either price-to-income ratio (PIR) or rent-to-income ratio (RIR), and the latter method is often found to be relatively stable over time and across countries. We contend that RIR cannot accurately reflect affordability situations because of the income elasticity of housing demand. Informal housing markets exist in Hong Kong for low-income households to pay lower and more "affordable" rent by living in units of smaller size and poorer quality, which are often with irregularities. This study found that SDU households have a relatively low income elasticity of housing demand and a relatively high RIR. They face difficulties in adjusting their housing service quality and quantity to balance their income and expenditure budget. Even so, SDU households are observed to further downsize and forgo housing facilities to make their rents affordable.

Homeownership, Housing Demand, and Household Wealth Distribution in Turkey

ABSTRACTThis article analyzes housing market developments in Turkey over the past two decades. In particular, we estimate the permanent income elasticity, price elasticity, and interest rate elasticity of housing demand. We use 14 consecutive waves of the Turkish Statistical Institute (TURKSTAT) Household Budget Surveys (HBS) from 2003 to 2016. We find that the permanent income elasticity of housing demand is statistically significant at 26% in our restricted sample. However, we find that both the price elasticity and interest rate elasticity are not statistically significant. Therefore, our empirical analysis confirms that income is the main determinant of homeownership and housing wealth.

The income elasticity of housing demand in New South Wales, Australia

This paper studies the theoretical relationship between house prices and income by using the user cost equilibrium condition. Empirically, the long-run and short-run dynamics of this relationship are investigated by using data for 144 Local government areas (LGA) over 25 years from 1991 to 2015 in the state of New South Wales, Australia. The income elasticity of house prices for the state is estimated to be 1.07 by multi-factor panel data models and the cointegration analysis. The income elasticities across locations demonstrate a spatial pattern, higher in Sydney and the Sydney surrounds and diminishing as going to inland regional and rural areas. The Granger Causality of the co-integrated relationship has been studied sequentially and proves the unidirectional causality from income to house prices. Finally, the state-wide common factors are found to show widespread significance in contrast to the Sydney-wide common factors which only impact significantly the areas that surround Sydney within some particular spatial range.

Household mortgage demand: a study of the UK, Australia and Japan

PurposeHomeownership has been the main focus of housing policies in most countries. Typical means that households use to achieve homeownership is to take out a loan and supplement this with accumulated wealth for a downpayment. This paper aims to analyze the mortgage demand behavior of households in the UK, Australia and Japan.Design/methodology/approachUsing three panel data sets, HILDA for Australia, KHPS for Japan and USS for the UK, the paper estimates three equations using ordinary least squares: mortgage demand function, housing demand function and initial loan to value ratio function.FindingsThough homeownership is a preferred tenure and the mortgages are “recourse” loans, housing markets in these three countries operate in different mortgage market institutional structures. Results indicate that income elasticity of mortgage demand differ despite income elasticity of housing demand being similar. Different mortgage institutions in countries that pose constraints for borrowers also determine mortgage demand. Other factors such as demography and economic conditions have also played an important role in determining mortgage and housing demand.Originality/valueThe paper is first, to the authors’ knowledge, that explores the role of institutions in mortgage demand in a comparative framework for the UK, Japan and Australia.

International Real Estate Review

Since the late 2000s, many universities worldwide have seen a significant increase in the number of non-local students. This study examines the aggregate housing demand of those students and their impact on local rentals by using mainland students in Hong Kong as an example. The findings show that students have very different residential patterns and housing demand than other types of residents. Their income elasticity of commuting is close to 0, and they have lower income elasticity of housing demand compared with the local residents. As a group, they exhibit strong patterns of clustered living situations. By applying the differences-in-differences approach, the study finds that the average annual rental price has increased over 10% in neighborhoods with student clusters than in other comparable neighborhoods in recent years.

Income Elasticity of Housing Demand in China: micro-data evidence from Shanghai

Since 1998, the Chinese housing market has played a fundamental role in driving macroeconomic stability and economic growth. This paper attempts to estimate the income elasticity of housing demand in Shanghai based on a household survey conducted by the National Bureau of Statistics of China in 2007. We utilize a two-stage model, which integrates analysis of both tenure choice and housing demand. Our findings indicate that both permanent and current income has significant influence on tenure choice in Shanghai, and that owner-occupiers' permanent income elasticity of housing demand in Shanghai is between 0.375 and 0.447. Our research also suggests that migrant homeowners have higher permanent income elasticity than Shanghai natives and that most Chinese households are liquidity constrained with regards to obtaining homeownership. We also find that permanent income elasticity increases with age. Finally, the existence of an urban–rural and regional difference is shown.

Affordable homeownership policy

PurposeAffordable homeownership is a policy that is often accorded a great deal of policy attention by governments of many countries. This paper aims to examine the market implications of setting a housing price to income ratio target for a market segment by the government.Design/methodology/approachThe policy requires active intervention by the government with regard to the targeted sector. The paper uses a simple model of the housing market with a homeownership affordability target to derive the market implications of such targets.FindingsIn the presence of uncertainty and resource constraints, the objective of homeownership affordability is achieved for the targeted group at the expense of greater volatility in residential construction activity. When the size of the targeted sector is significant in size, there are spillover price and crowding out effects on the non‐targeted housing market segment.Research limitations/implicationsThis results in political pressure on the government to expand homeownership affordability targets to increasing segments of the population. Housing price to income ratios tend to be fairly constant over time and across targeted groups, the housing supply is relatively price inelastic and the income elasticity of housing demand is less than one.Practical implicationsThe Singapore government intervenes extensively in the housing sector to ensure homeownership affordability, with a resulting homeownership rate of 91 percent for the resident population. The above hypotheses regarding the implications of setting housing price to income ratio targets are tested using the Singapore housing market.Originality/valueThis paper adds to the literature by analyzing the market implications of setting homeownership affordability targets in the context of a targeted housing segment.

A Cross-Section Analysis of the Income Elasticity of Housing Demand in Spain: Is There a Real Estate Bubble?

Much attention has been given to claims that real estate prices in Spain are overvalued in relation to income and how plummeting house prices can jeopardize the economy (The Economist, 2003 and IMF, 2004). The measure of income elasticity on housing expenditure is often of considerable interest to applied researchers and policy makers in real estate economics, but the problem of omitted variables in some estimation techniques can lead to severe biases. In this paper we estimate the income elasticity of the demand for housing in Spain based on the cross-section of prices and income in fifty Spanish provinces from 1996 to 2002. In comparison to long-run equilibrium models fitted with time-series data, our results show a much weaker role of income growth as a vehicle for house price increases in the long run. According to our estimates, the rate of growth of house prices in Spain between 1998 and 2003 points to a real estate bubble with prices above the long-term equilibrium level.

Capitalization of federal taxes, the relative price of housing, and urban form: density and sorting effects

We investigate the impact of the tax treatment of owner-occupied housing on urban form in an economy in which high and low income households choose among city and suburban communities. The spatial impact of housing tax policies differs depending upon the extent to which the subsidy is capitalized into city land prices and whether a land use constraint such as suburban large lot zoning exists to make poorer households less mobile. The greater the extent of capitalization, the larger the decentralization impact. And, in the presence of binding large lot zoning in the suburbs, the rich have a greater incentive to decentralize while the poor are constrained to the city. It is noteworthy that our analyses of community choice and residential sorting by income are not driven by different preferences for city or suburb that may be associated with the income elasticity of housing demand. Rather, our conclusions arise from changes in relative after-tax housing prices faced by poor and rich households. Determining the empirical relevance of prices versus preferences in these matters should be an urgent task for future research.

Amenities and urban residential structure: An amenity-embedded model of residential choice

The basic model of residential choice, which has been established by generalizing Von Thunen's concept to an urban context, states that the equilibrium structure of residential land use is determined by the trade-off between accessibility and space. The willingness to sacrifice space for accessibility differs between households and depends on household income. The equilibrium land use is the outcome of the interplay between the income elasticity of space consumption and the income elasticity of commuting outlays. The primary purpose of this article is to extend the basic model by incorporating a location-dependent quality of the environment. The proposed model examines the locational consequences of household choice as influenced by a complicated interplay among three factors: the income elasticity of housing demand, the income elasticity of commuting costs, and the location-dependent amenity schedule. The equilibrium land use is contrasted for two types of cities: the case 1 city in which the level of amenities increases toward the urban fringe, and the case 2 city in which the level of amenities is assumed to decrease as one moves toward the urban fringe.

Amenities and urban residential structure: An amenity‐embedded model of residential choice

Abstract The basic model of residential choice, which has been established by generalizing Von Thünen's concept to an urban context, states that the equilibrium structure of residential land use is determined by the trade‐off between accessibility and space. The willingness to sacrifice space for accessibility differs between households and depends on household income. The equilibrium land use is the outcome of the interplay between the income elasticity of space consumption and the income elasticity of commuting outlays. The primary purpose of this article is to extend the basic model by incorporating a location‐dependent quality of the environment. The proposed model examines the locational consequences of household choice as influenced by a complicated interplay among three factors: the income elasticity of housing demand, the income elasticity of commuting costs, and the location‐dependent amenity schedule. The equilibrium land use is contrasted for two types of cities: the case 1 city in which the level of amenities increases toward the urban fringe, and the case 2 city in which the level of amenities is assumed to decrease as one moves toward the urban fringe.

International Real Estate Review

Housing policy formulation should be informed by a careful understanding of the behaviour of the housing market, as reflected by housing demand. Such basic information is important, not only for improved project design but also for the development of better sector-wide policies. Housing is a complex outcome of cultural, economic and regulatory environment. Consistent estimates of price and income elasticity of housing demand are prerequisites for effective policy design. Results, from earlier studies on Japanese housing markets, are inconclusive and the estimates of price and income elasticity of housing demand vary over a wide range. It may be argued that measuring the volume of housing services as housing expenditure, as is done in previous research, essentially ignores the heterogeneity, and for large number of policy purposes like impact of tax on tenure choice, choice between owning and renting etc., the distribution of housing consumption into qualitatively different categories is of more interest than an aggregate qualitative measure of housing expenditure alone. This paper analyzes the demand for housing in Tokyo using a discrete choice model. Three dimensions of choice, tenure, dwelling size (as number of rooms) and structure type (as type of unit) determine demand for housing which are modeled simultaneously. The income elasticity of market share of ownership house is positive and ranges between 0.16 to 0.34. However, income elasticity for rental houses is negative ranging between -0.17 to -0.57. The own price elasticities vary over a large range from -0.03 to -5.1 with smaller in magnitude for ownership houses and larger for rental houses.

Housing demand in Russia: Rationing and reform1

AbstractIn a number of articles Alexeev (1988a) and (1988b) shows that in the former Soviet Union the administrative rationing of housing was partially replaced by market forces acting through the second economy. This paper uses a much richer dataset to update his analysis for Russia to consider housing demand in 1992, the last year of the administrative allocation system. Almost immediately after the survey used for this analysis Russia began to privatize the housing stock as part of its movement towards a market economy. The questions we ask are: Were households really able to beat the system, as argued by Alexeev and, if so, were they still able to do so in 1992? Our answer to the second question is that in 1992 households were not able to beat the system. Income had no observable effect on housing demand. Furthermore, we do not think that the difference in our empirical results and Alexeev's is due only to the broader economic changes that occurred since his estimation or the richer dataset available to us. Indeed, our answer to the first question is that there are good reasons for arguing that Alexeev's estimates of the income elasticity of housing demand are biased upwards.

The streetcar and residential location in nineteenth century Philadelphia

The Alonso-Muth model predicts how a worker’s income affects his residential location within an urban area. Workers choose a residential location, balancing the lower rent at locations distant from the city center against the higher commuting cost that such locations entail. If the income elasticity of housing demand is greater than that of marginal commuting cost, the bid-rent function of a high-wage worker is flatter than that of a low-wage worker, and thus the high-wage worker lives farther from the city center. This theory, which was first articulated in the 1960s was consistent with empirical evidence from that period. The model did not fare so well in the 1970s and 198Os, however. On one hand were new studies of housing demand. Polinsky and Ellwood (20) pointed out biases in earlier studies and found income elasticities less than unity when these biases were corrected. These results indicate that the income elasticity of housing demand is less than that of marginal commuting cost, since the latter is typically close to unity, which in turn implies that the bid-rent function of a high-wage worker is steeper than that of a low-wage worker. Wheaton (25) provided more direct evidence on this point. He estimated bid-rent functions of different income groups and found no significant difference between those of higher and lower income households. These studies suggested that the Alonso-Muth model could not explain the residential pattern observed in the 1950s and 1960s. On the other hand was the change in that pattern. In the 197Os, upper-income households began to return to the cities, the so-called

SUFFICIENT CONDITIONS FOR NEGATIVE EXPONENTIAL DENSITIES A FURTHER ANALYSIS

ABSTRACT Brueckner correctly pointed out that one of the sufficient conditions for negative exponential densities is a unitary price elasticity of the compensated, not the uncompensated, demand for housing. This note shows that the Brueckner condition implies a zero income elasticity of housing demand when income and price elasticities are constrained to be constants. It also derives the utility function that gives rise to negative exponential densities in this case, given that other standard assumptions are satisfied. In light of empirical evidence, justification for the popular negative exponential functional form seems rather weak.

Theory and estimation in the economics of housing demand

The main purpose of this paper is to review recent theoretical and empirical developments in the economics of housing demand. In particular we ask, What is known concerning the permanent income elasticity of housing demand vis-a-vis the current or measured income elasticity? What is known concerning price elasticities ? What is the appropriate functional form for housing demand equations? What is the role of demographic variables? What is known concerning dynamic aspects of housing demand? What appear to be the major sources of bias in existing estimates of demand equations?

THE INCIDENCE OF THE PROPERTY TAX ON HOMEOWNERS: Evidence from the Panel Study of Income Dynamics

The incidence of the property tax on owner-occupied housing has been shown to be a function of the income elasticity of housing demand and the elasticity of effective tax rates with respect to housing value. Based upon assumed and estimated values of these two parameters, implications have been drawn in recent literature regarding the relationship between property taxes paid and the level of income. After critically reviewing the literature on the values of these elasticities, this study presents estimates of these elasticities and direct evidence on the relationship between property taxes and income obtained from the Panel Study of Income Dynamics. Equations are estimated for the nation, for twelve city size and region groups, and for different income classes. Results indicate that the property tax on homeowners is progressive at the national level, and generally proportional at the local level.

An Empirical Reconciliation of Micro and Grouped Estimates of the Demand for Housing

T is not uncommon for estimates of the income elasticity of housing demand based on metropolitan-wide averages to be 60% to 90% higher than estimates based on individual household data. Price elasticity estimates also vary greatly among micro and grouped studies, although no pattern has emerged. Such differences cannot be explained by the unit of observation since the grouping of observations in a correctly specified equation does not by itself affect the expectations of the estimates. Therefore, it seems likely that the housing demand equations have been misspecified, possibly in a number of different ways. The purpose of this paper is to show empirically that frequently made specification errors can account for the very different estimates obtained from micro and grouped equations, and that the correctly specified equations are reconcilable.1 Previous studies have not been able to examine these issues properly because of the absence in the micro demand equation of a housing price term that varies with each observation.2 A common practice has been to use micro housing expenditure and income data from one source in conjunction with a metropolitan-wide index of housing price from a completely different source. Aside from disparities in the data bases, this practice does not take into account the fact that the unit price of housing (for a standardized bundle of land and structure) varies substantially by location within a city. Such variation occurs because of differences among sites, for example, with respect to workplace accessibility. Thus, individuals with similar incomes residing at different locations would be expected to purchase different quantities of housing because they face different unit prices of housing. The present study is able to overcome this problem by developing a new technique for estimating the appropriate unit price of housing for each micro observation and then applying it to a unified data base. Section II describes the correctly specified and the misspecified micro and grouped demand equations to be estimated. In section III the technique for calculating micro housing prices is derived. Section IV discusses the data. Section V presents and analyzes the empirical results. Finally, in section VI the results are summarized and qualified.

The Demand for Housing: An Empirical Postscript

equation, yet estimates of the income elasticity of housing demand derived from micro data are systematically lower than estimates obtained from grouped (metropolitan-wide) data. The explanation proposed was based on the effects of common specification errors related to the housing price term. It was demonstrated theoretically that, given certain assumptions, the omission of the price term biases the ungrouped income elasticity estimate downward (whether stratified by metropolitan area or not) and the grouped estimate upward. It was also shown that the inclusion of a metropolitan-wide housing price index in the micro equation worsens the downward bias of the income elasticity estimate (and biases the corresponding price elasticity estimate toward zero). At the time the paper was written, the only empirical evidence directly relevant to this price misspecification hypothesis was contained in a study by Maisel, Burnham, and Austin [1]. It was shown that their income elasticity estimates were entirely consistent with the proposed explanation. Although their price elasticity results were not consistent, it was suggested that this could easily be attributed to sampling error. The purpose of this note is to discuss the relevance of some new empirical estimates of housing demand for the price misspecification hypothesis. These results are part of a broader study of housing demand undertaken by the author with D. T. Ellwood [3]. Since that study discusses the data and the specification of the equations in detail, the focus here is on those aspects of the data and results which are especially relevant to the price misspecification explanation.

The Demand for Housing: A Study in Specification and Grouping

The low estimates of the income elasticity of housing demand obtained when individual households are the unit of observation are theoretically reconciled with the high estimates obtained when metropolitan-wide averages are used. The omission of the housing price term biases the ungrouped (whether stratified by metropolitan areas or not) estimate(s) downward and the grouped estimate upward. The inclusion of a metropolitan-wide average housing price term worsens the downward bias of the unstratified ungrouped estimate. The corresponding price elasticity estimate is biased upward (toward zero). These results are interpreted in terms of the theory of residential location and used to explain the empirical evidence. For the evidence considered, the true income and price elasticities are approximately .75 and -.75, respectively.