Download Cardiff – Social status and the demand for housing

Social status and the demand for housing
Alex Marsh
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Preliminaries
• Exciting times for housing and the economy
• Implied audience
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Where we’re going ...
• Relativities and social status in economic thinking
• Relativities in the economics of housing
• Implications
• Identification
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• “a great portion of the expenses of the higher and
middle classes in most countries, ... , is not
incurred for the sake of the pleasure afforded by
the things on which the money is spent, but from
regard to opinion, and an idea that certain
expenses are expected from them, as an
appendage of station.”
• (J.S. Mill, 1848, The Principles of Political
Economy, Book 5 Chapter VI.2)
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• “One reason why the interpersonal effects on demand have
been ignored in current texts may be the fact that Marshall
did not consider the matter in his Principles. We know,
however, from Marshall's correspondence, that he was aware
of the problem. Both Cunynghame and Pigou pointed out that
Marshall's treatment of consumers' surplus did not take into
account interpersonal effects on utility. Marshall seemed to
feel that this would make the diagrammatical treatment too
complex.”
•
Leibenstein, H. (1950) Bandwagon, snob and Veblen effects in the
theory of consumers’ demand, QJE, p186.
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Leibenstein’s classification of
demand
• A. Functional
• B. Nonfunctional
– 1. External effects on utility
• (a) Bandwagon effect
• (b) Snob effect
• (c) Veblen effect
– 2. Speculative
– 3. Irrational
• (1950, p188)
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Hirsch on the positional
economy
• “The positional economy ... relates to all aspects of
goods, services, work positions, and other social
relationships that are either (1) scarce in some
absolute or socially imposed sense or (2) subject to
congestion or crowding through more extensive
use.”
• (Hirsch, 1977, The social limits of growth, p27)
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This isn’t a new issue for
those thinking about the
economics of housing
• “Although social scientists, and particularly
sociologists, have long recognised that individuals
make group decisions and that goods may impact
status, with status increasing with price per se,
economists have made little attempt to analyse
such potentially important characteristics of
housing”
• (Maclennan, 1982, p47)
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Re-emerging issue?
• O’Sullivan and Gibb (2003, p2):
– “Demand for ‘housing’ in the real world ... reflects the fact
that housing is in part at least a ‘positional good’”
• Bramley et al (2008, p180)
– “House prices appear to be quite strongly related to the
social status of neighbourhoods. There are many
overlapping explanations for this: unmeasured quality
variation in the houses, better schools, less crime, nice
gardens or better maintenance. Whatever it is, it is going
to be reinforced by the demand side/affordability factor—
only the better-off can afford to live in a high price area—
and by any tendency to ‘positional competition’”
Housing as a
consumption good
• Tastes and preferences taken as given
– De gustibus non est disputandum
• Utility derived from the characteristics of the
dwelling
• The ‘characteristics’ typically start with dwelling
structure and accessibility but then add a range of
neighbourhood variables including local amenities,
public goods, and social environment.
• Hedonic price studies
• Submarket studies
Housing as an investment
good
• Housing market as an asset market
• Resource allocation to, and timing of,
investment; tenure switching
• Efficient market or otherwise
Relativities are back on
the agenda
• Happiness and economics
– The Easterlin paradox
– Relativities and reference levels in
consumption
• Behavioural economics:
– Nonstandard preferences
– Nonstandard beliefs
– Nonstandard decision making
– (DellaVigna, 2009, Journal of Economic
Literature)
The positionality of
housing
• Distribution of sensitivities to relative
consumption
• Observability/Signalling
• Cars and Housing more positional
than Insurance and Vacations
• Some respondents positional on all
goods
• Alpizar, Carlsson and Johansson-Stenman (2005) How much
do we care about absolute versus relative income and
consumption?, Journal of Economic Behaviour and
Organization, vol 56.
Reference-dependent
preferences
• Standard economics assumes that welfare
is a function of absolute levels of
consumption
• An alternative is to see preferences and
welfare as dependent (in part) on reference
levels
• ‘Keeping up with the Jones’
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Housing scenarios
•
• Scenario A
•
• You live in a onebed apartment in the
desirable Marina
quarter
• Your friends all live •
in bedsits with
shared facilities just
across the road
Scenario B
You live in a two-bed
apartment in the
desirable Marina
quarter
Your friends all live in
three bed townhouses
in an exclusive
recently-developed
Maritime complex
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Implications
• Overconsumption of the good that is acting
as a status signal (relative to the ‘functional’
level of consumption)
• Status races
– The “positional arms race”
• (Progressive) taxation of the consumption
of status goods
– Environmental payoff?
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Implications?
• Dynamics and housing market cycles
– Fundamentals versus ‘irrational exuberance’
– Rational versus irrational
• ‘Non functional’ status demand as cyclical?
– Turning points
• Responses
• Social multiplier (Shifting the frame of reference)
• Rational
• Conveys information
• Move before priced out of the market
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Identification
• Identification and formation of peer groups
– Selection effects
• Experimental versus field data
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Causality/interpretation
(following Manski, 1993)
• endogenous interactions: the propensity of an
agent to behave in a certain way varies with the
behaviour of the group members,
• exogenous (contextual) interactions: the propensity
of an agent to behave in some way varies with the
exogenous characteristics of the group members,
• correlated effects: agents in the same group tend
to behave similarly because they have similar
individual characteristics or face similar institutional
environments.
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“Men do not desire to be rich, but
richer than other men” (J S Mill)
• The examination of interdependencies in
consumption is becoming increasingly common
• This significantly affects results
• We recognise that consumption and investment
motives generate complexity in housing demand
• Relativities in housing are recognised informally,
but not explored very extensively in theory or
empirically
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• There are significant empirical challenges (both in
terms of data and technique) in disentangling social
interaction effects from other components of
demand.
• Unnecessary complexity?
• It is an area that offers considerable potential for
developing our understanding of housing market
behaviour
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• A summary of this paper will be posted on my blog
later today/tomorrow:
http://alexsarchives.wordpress.com
• It will link through to these powerpoint slides
• Feel free to comment there (on this or any other
post)