Price Elasticity Of Housing Demand Research Articles

Housing demand in Indian metros: a hedonic approach

PurposeThis paper aims to understand housing demand of urban Indian households in terms of housing and household-level characteristics. Because a house is a bundle of certain characteristics which vary across houses, each characteristic has an implicit price. Finding this implicit price for certain important characteristics is the first objective of this study. The second objective of the paper is to compute the income elasticity and price elasticity of housing demand for these cities.Design/methodology/approachTo achieve comparable estimates, household-level data from India’s National Sample Survey Organisation housing surveys for the years 2002 and 2008-2009 have been used. A hedonic price function is estimated using ordinary least squares (OLS) and Box-Cox functional forms to estimate the implicit prices of housing characteristics. This exercise is attempted for owned and rented houses separately. Demand function required for computing the elasticities, uses the hedonic price index derived from the implicit prices and household characteristics.FindingsThe study finds housing demand to be income elastic and price inelastic for the six cities across both the time periods.Originality/valueFirstly, this study includes housing characteristics such as individual access to drinking water, modern sanitation facility, separate kitchen, condition of the structure, existence of a road with street light and whether the house is in a slum or non-slum area in the hedonic price function. These variables were not used in any of the earlier studies pertaining to India. Secondly, it uses the Box-Cox non-linear form to derive the hedonic price function, a specification not used earlier. Thirdly, this is the first study analysing housing demand across the six largest Indian cities.

Do investment and improvement demand outweigh basic consumption demand in housing market? Evidence from small cities in Jiangsu, China

Housing problems in China have recently aroused wide range of interests of scholars. Housing demand, which is a classical discussing point in academia, also acts as reference for governments to enact loose, tense or neutral housing policies. However, studies scrutinizing the housing demand structure, particularly from consumption and investment perspectives are scant. Existing researches have mostly focused on the mature housing market in large cities in China, and the housing market in small cities has rarely been addressed. In this study, housing demand is deliberated in two respective dimensions of rent/own and consumption/investment demand. Price elasticities are obtained through formulating demand functions of each demand category with micro-data collected through questionnaire survey in small cities in Jiangsu. Underpinned by the set of elasticity coefficients, detailed housing demand structure can be calculated proportionately.Results suggest that the improvement and investment housing needs have outweighed basic consumption demand in small cities in Jiangsu Province. Housing price rising has a promoting effect on residential housing demand, which is in stark contrast to the existing studies on price elasticity of housing demand in large cities in China. Factors of urbanization significantly influence the housing need of residents in small cities. Improvement of urbanization rate would contribute to the consumption demand booming while prosperity of tertiary industry would boost improvement and investment housing demand. Not only could the analytic methodology of housing demand structure demonstrated in this paper be referenced, but the empirical answers carry vital implications for governments implementing diverse policy design in large and small cities in China.

Housing demand in Mexico

This paper analyzes the components of housing demand in Mexico in the context of developing and developed nations. The case of Mexico is particularly interesting given that population and income dynamics, as well as current housing shortages, suggest that the demand for housing will significantly increase in the near future. We use micro-level data from market-based mortgages that originated during the period of 2002 to 2004 for 21 metropolitan areas in Mexico. We find the price elasticity of housing demand to be −0.3, lower than previous studies for developed countries and within the range for developing countries. Permanent income is a major component of housing demand, with an elasticity of 0.8. In contrast, temporary income has a very low elasticity of 0.04. The mortgage rate elasticity for 25-year mortgages is −0.39. We believe these results provide important information to policy makers and practitioners in Mexico and other developing nations.

A structural econometric model of price discrimination in the French mortgage lending industry

We propose a model of discrimination in the market for mortgages. The model explains accepted loan applications and simultaneously determines loan sizes and interest rates. A competitive and a discriminating monopoly version of the model are proposed. Offered interest rates and loan sizes are a function of observable borrower characteristics. The competitive model rests on a marginal condition, reflecting contract optimality, to which a zero-profit condition is added. In contrast, the discriminating monopoly maximizes profits under a borrower participation constraint, reflecting the availability of a rental market as an outside option. Each version of the model is a bivariate, nonlinear model, and is estimated by standard maximum likelihood methods. The data used for estimation is a sample of clients of a French network of mortgage lenders. We show the presence of “social discrimination” in the data, the loan conditions depending not only on the borrower's wage and down payment, but also on the borrower's occupational status. Abnormally high risk premia in the competitive version of the model suggest the presence of market power, justifying an attempt at estimating its monopolistic version. The discriminating monopoly model estimates show that the borrowers' price-elasticity of demand for housing varies with occupational status, and is inversely related with the lender's interest rate markups. This confirms that the lender exploits structural differences in the preferences to discriminate, as predicted by standard theories.

A Structural Econometric Model of Price Discrimination in the Mortgage Lending Industry

We propose a model of in the market for mortgages. The model explains accepted loan applications and determines loan sizes and interest rates simultaneously. A competitive and a discriminating monopoly version of the model are proposed. Offered interest rates and loan sizes are a function of observable borrower characteristics. The competitive model rests on a marginal condition, reflecting contract optimality, to which a zero-profit condition is added. In contrast, the discriminating monopoly maximizes profits under a borrower participation constraint, reflecting the availability of a rental market as an outside option. Each version of the model is a bivariate, nonlinear model, and is estimated by standard maximum likelihood methods. The data used for estimation is a sample of clients of a French network of mortgage lenders. We show the presence of social discrimination in the data, the loan conditions depending, not only on the borrower's wage and downpayment, but also on the borrower's occupational status. Abnormally high risk premia in the competitive version of the model suggest the presence of market power, justifying an attempt at estimating its monopolistic version. The discriminating monopoly model estimates show that the borrowers' price-elasticity of demand for housing varies with occupational status, and is inversely related with the lender's interest rate markups. This confirms that the lender exploits structural differences in the preferences to discriminate, as predicted by standard theories.

The Economic Determinants of Young People's Household Formation

The paper derives predictions about the impact of the price of housing, young adults’ income and parental income on the probability that a young adult lives apart from his/her parents. It shows that the predicted effect of the price of housing is intimately related to the price elasticity of housing demand. It uses longitudinal data on a cohort of Britons born in 1958 (surveyed in the National Child Development Study) to estimate dynamic models of first departure from the parental home, and particularly to estimate the impact of housing price on the timing and destination of first departure.

The Demand for Housing in Britain and Population Ageing: Microeconometric Evidence

The paper estimates a household's demand function for housing using household data. Esti- mates of the price and (current) income elasticities are robust at about -0 4 and 0 5 respec- tively. Independent of price and income effects, there is a strong age pattern to household demand. In conjunction with the age profile of household formation, this pattern implies that changes in the age distribution of the population have important effects on aggregate housing demand, although economic growth dominates in determining its rate of growth. During the 1980s there was a dramatic boom in British house prices, followed by large declines in the early 1990s. While financial deregulation and rapid growth in real incomes for people in non-manual occupations contributed to the rise in housing demand and prices, changes in the population's age distribu- tion also played a role (Ermisch 1990). In particular, the number of people in the prime ages for first house purchase increased as a consequence of the baby boom of the 1960s. The fall in birth rates during the 1970s and continued low fertility during the 1980s entail smaller numbers in these prime ages and an ageing of the population more generally. What effect will these changes in the age distribution of the population in Britain have on housing demand and house prices? It may be possible to use aggregate data to answer this question, (e.g. in Fair and Dominguez 1991), but, as recently stressed by Stoker (1993), the most informative assessments of such distributional effects on demand come from studying individual-level cross-section or panel data. A recent study in this vein, by Mankiw and Weil (1989), of the US housing market experience has attracted a great deal of attention because it suggests that house prices are going to fall dramatically in the coming years because of the ageing of the population. While their study estimates an age pattern of housing demand from micro data, they admit it is a biased estimate, and their conclusions concerning the impact of age distribution on house prices are based on a simple, aggregate time-series equation, which omits income and other housing demand and sup- ply shifters. This paper takes a microeconometric approach. It estimates a demand func- tion for housing in Britain, and then examines the implications of prospective changes in the age distribution for housing demand. An important by-product in estimating the demand function is an estimate of the price elasticity of housing demand. Despite the importance of this parameter in assessing the impact of policy changes, estimates of it for Britain are few, and existing ones are questionable, because of the absence of appropriate data for its estimation.

The Price Elasticity of Housing Demand in Britain: Issues of Sample Selection

This paper contains estimates of the price and income elasticities of housing demand for six British conurbations. Using 1988/1989 data from the Joseph Rowntree Foundation Housing Finance Survey, the estimates are derived from a hedonic house price equation. Consideration is given to the possibility of sample selection bias. The price elasticity estimates are found to be robust with respect to alternative specifications and corrections for sample selection bias. However, there is clear evidence of sample selection bias and the effect of this is most clearly seen in the estimates of income elasticity which increase when allowance for bias is made.

What is the Price Elasticity of Housing Demand?

DISAGREEMENT about the responsiveness of housing demand to variations in relative prices persists, despite extensive empirical analyses. Two factors underlie this disagreement: the multidimensional character of housing makes direct observation of prices (as distinct from expenditures) impossible; and, the significant search, transactions, and moving costs associated with changing dwellings imply that, at any instant, a given household's consumption may deviate significantly from its utility maximizing level in a static equilibrium. While a number of ingenious attempts have been made to circumvent these problems, each is quite indirect and relies upon strong, and untestable, assumptions (cf. Mayo (1978)). This paper provides direct estimates of price elasticities, based upon an explicit model of housing consumption dynamics and utilizing the experimental manipulations of housing prices incorporated in the Housing Allowance Demand Experiments.1 While the data are limited to two years of longitudinal data and pertain only to low income renters, they nevertheless permit the direct estimation of this key parameter of housing demand. This analysis focuses on the price responsiveness of households, but clearly other changes in household circumstances (such as in income or family size) affect desired housing consumption. In fact, given the limited longitudinal data, information about other demand adjustments provides valuable insights into consumption dynamics. Price changes can be viewed as but one of a variety of exogenous influences on housing demand. A complete structural model of housing demand would consider the joint influence of household preferences, relocation costs, and prices on search and moving behavior and, conditional on this, their subsequent influence on housing consumption. However, both household preferences and relocation costs are generally unobserved, and estimation of such a complete model is simply beyond our current capabilities. We concentrate upon the more modest goal of modelling the reduced form relationship between housing consumption and housing stock disequilibrium (defined below). Consumption dynamics are represented by variants of a linearized stock adjustment process . This formulation is based on the simple observation that adjustments will generally be a monotonic function of the magnitude of disequilibrium in housing consumption. As indicated by past work (Hanushek and Quigley, 1979), this is both a convenient and powerful characterization of short run dynamics. Two basic formulations of consumption dynamics are considered. Let Htd represent the desired, or static equilibrium, quantity of housing demanded by a given household, and let Ht be the actual (observed) housing consumption at time t. In the simplest form, households are assumed, on average, to close the gap between desired and equilibrium housing consumption at a constant rate a, so that