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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
• Reason for different Demand of Owners and
Renters
• Influences on Decision to Rent or Buy and
Housing Demand
• Some empirical results
• Conclusions
Motives for Housing Demand
Looking on
Consumption • Housing Services
Motive
Investment
Motive
• Housing Services
• Housing as Asset
1.Tenure Choice:
rent or own
2.Quantity Decision
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)
To Decide Tenure Choice
1
Different Hedonic prices for Owners and for Renters
2
Compare prices for
generalized house on market:
Relative Price (per unit)
=Owner Price/Renter Price
Result
3
For specific house:
sum of hedonic prices
interpreted as reconstruction costs
Value-Rent Ratio= Asset value
Rental Value
=capitalized rents + expected capital gain
rent
Tenure choice
= f(relative prices, value-rent ratio, income, age)
Tenure Choice and Housing Demand
Value-Rent
ratio
Investment
Demand
Owner/Renter
Price (per unit)
Tenure Choice
Permanent
Income
Quantity of
Housing
Current
Income
Tenure
Choice
Elasticity
with Respect to
Relative price:
-1.436
Elasticities of Demand
Income Permanent I. Current I.
nQo,Y
0.173
0.285
nQr,Y
nQ,Y
0.084
0.301
Price
-0.766
nPo
0.311
nPr
Value-rent-ratio
0.775
nvalue-rent
0.195
0.413
-0.792
0.292
0.778
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