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An Econometric Model of Housing Price, Permanent Income, Tenure Choice and Housing Demand

Journal Article Presentation:. An Econometric Model of Housing Price, Permanent Income, Tenure Choice and Housing Demand. By Allen C. Goodman in Journal of Urban Economics, 23, 327-353 (1988) Presented by Till K. Kuhr December 2, 2002. Overview.

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An Econometric Model of Housing Price, Permanent Income, Tenure Choice and Housing Demand

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  1. Journal Article Presentation: An Econometric Model of Housing Price, Permanent Income, Tenure Choiceand Housing Demand By Allen C. Goodman in Journal of Urban Economics, 23, 327-353 (1988) Presented by Till K. Kuhr December 2, 2002

  2. Overview • Reason for different Demand of Owners and Renters • Influences on Decision to Rent or Buy and Housing Demand • Some empirical results • Conclusions

  3. Looking on 1.Tenure Choice: rent or own 2.Quantity Decision Housing Demand Consumption Motive • Housing Services Motives for Housing Demand

  4. Tenure Choice • Tenure Choice: decision to rent or own; may involve expectation over future and possible investment characteristics of the housing bundle • Tenure Choice Function =f(relative prices, value-rent ratio, income, age)

  5. To Decide Tenure Choice 1 Different Hedonic prices for Owners and for Renters 2 3 For specific house: sum of hedonic prices interpreted as reconstruction costs Compare prices for generalized house on market: Value-Rent Ratio= Asset value Rental Value =capitalized rents + expected capital gain rent Relative Price (per unit) =Owner Price/Renter Price Result Tenure choice = f(relative prices, value-rent ratio, income, age)

  6. Value-Rent ratio Owner/Renter Price (per unit) Quantity of Housing Investment Demand Tenure Choice Permanent Income Current Income Tenure Choice and Housing Demand

  7. Income Permanent I. Current I. nQo,Y 0.173 0.285 nQr,Y 0.084 0.195 nQ,Y 0.301 0.413 Price nPo -0.766 -0.792 nPr 0.311 0.292 Value-rent-ratio nvalue-rent 0.775 0.778 Tenure Choice Elasticity with Respect to Relative price: -1.436 Elasticities of Demand

  8. Conclusions • Consumption and investment demands for housing • Tenure choice influences quantity of housing services demanded • Impacts of income and/or price affect tenure choice and quantity decision simultaneously Possible future Estimation: • Actual separation of housing demand into consumption and investment portion

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