Microeconomic Models of Housing Markets PDF
Preview Microeconomic Models of Housing Markets
Lecture Notes in Economics and Mathematical Systems Managing Editors: M. Beckmann and W. Krelle 239 Microeconomic Models of Housi ng Markets Edited by Konrad Stahl Spri nger-Verlag Berlin Heidelberg New York Tokyo Editorial Board H. Albach M. Beckmann (Managing Editor) P. Dhrymes G. Fandel J. Green W. Hildenbrand W. Krelle (Managing Editor) H.P. KUnzi G.L Nemhauser K. Ritter R. Sato U. Schittko P. Schonfeld R. Selten Managing Editors Prof. Dr. M. Beckmann Brown University Providence, RI 02912, USA Prof. Dr. W. Krelle Institut fUr Gesellschafts-und Wirtschaftswissenschaften der Universitat Bonn Adenauerallee 24-42, 0-5300 Bonn, FRG Editor Prof. Dr. Konrad Stahl Lehrstuhl Wirtschaftstheorie, insbesondere StadtOkonomie Universitat Dortmund Postfach 500500, 0-4600 Dortmund 50, FRG ISBN-13:978-3-540-15193-7 e-ISBN-13 :978-3-642-46531-4 DOl: 10.1007/978-3-642-46531-4 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically those of translation, reprinting, re'use of illustrations, broadcasting, reproduction by photocopying machine or similar means, and storage in data banks. Under § 54 of the German Copyright Law where copies are made for other than private use, a fee is payable to 'Verwertungsgesellschaft Wort", Munich. © by Springer-Verlag Berlin Heidelberg 1985 2142/3140-543210 PREFACE The present volume is an outgrowth of several years' interactions be tween U.S.American and W.-German economists interested in analyzing the structure and functioning of housing markets, and the impacts of govern mental policies on these markets. Such an interaction turns out to be fruitful in several respects. Unquestionably, German economists can learn a lot from the high level of sophistication exhibited in much of the American literature. However, this is not a one way road of learning and the adoption of concepts, for the following reason. Most of the analysis presented in that literature hinges on the use of the standard microeco nomics textbook tools. Now, even a casual observation of housing markets in European countries reveals that behavior and conduct in these markets do not follow the assumptions presumed in this mode of analysis, which calls into question the uncritical employment of that tool kit. This has important consequences for policy analysis and indeed, for some principal attitudes towards housing policy, and points sharply to the need for developing analytical concepts that take up more of the pecul iarities of housing market behavior and conduct. While such a develop ment may be particularly warranted in view of European housing markets, we maintain this to be the case in view of the American housing market as well. At any rate, the models discussed in this volume represent an array of alternatives towards looking at the housing market in its complexities and idiosyncrasies. All but one of these models - namely Wiesmeth's - are quantitative rather than qualitative, and Wiesmeth's is really de veloped in view of such a quantification. This is not by chance. In the modellers' perception, the idiosyncrasies of the housing market can be better captured in empirical models rather than in purely analytical ones that are bound to be much more stylized. The models presented here differ in many respects. The most striking dif ference is in their conceptualization of the equilibrating process in the housing market; more specifically, in that of the short run equilibrium. Kain and Apgar's Harvard Urban Development Simulation Model is in that respect closest to the neoclassical concept, by which price adjustments provide for market clearance. An extreme contrasting view is taken in Wiesmeth's model: therein, prices are exogenously fixed, and the housing market equilibrates via demanders' quantity adjustments. Behring and Goldrian's Ifo-Model contains a market clearing process in termediate between these two extremes. Yet a third extreme is presented in Wegener's Dortmund Simulation Model, in which the market clears via a sequence of partially interacting bilateral bargaining processes be tween individual demanders and suppliers. The presentation of all these alternative approaches is preceded by an introduction in which some key peculiarities of the housing market and their potential impacts on allo cation decisions therein are exposed and discussed, and it is closed by Todt's notes on the historical evolution of housing market analyses. While at first glance, many of those peculiarities appear to be unique to the microeconomic structure of the housing market, a closer look re veals striking similarities to the labor market and its microeconomic organization. A further exploitation of these structural similarities should prove to be useful for the analysis of probably the two most im portant markets of our economies. CONTENTS Preface III Contributors VII 1. Microeconomic Analysis of Housing Markets: Towards a Conceptual Framework Konrad Stahl, 2. The Harvard Urban Development Simulation Model John F. Kain and Wil,l,iam C. Apgar, Jr. 27 3. Fixprice Equilibria in a Rental Housing Market Hans Wiesmeth 72 4. The Ifo Housing Market Model Karin Behring and Georg Gol,drian 119 5. The Dortmund Housing Market Model: A Monte Carlo Simulation of a Regional Housing Market Michael, Wegener 144 6. postscript The Evolution of Housing Market Analysis: A Historical Perspective Horst Todt 192 CONTRIBUTORS William C. Apgar Joint Center for Urban Studies 66 Church St. Cambridge, MA. 02138 USA Karin Behring Ifo Institut fur Wirtschaftsforschung Poschingerstr. 5 8000 Munchen 86 W.-Germany Georg Goldrian Ifo Institut fur Wirtschaftsforschung Poschingerstr. 5 8000 Munchen 86 W. -Germany John F. Kain Kennedy School of Government Harvard University Cambridge, MA. 02138 USA Konrad Stahl Lehrstuhl Wirtschaftstheorie Universitat Dortmund Postfach 500500 4600 Dortmund 50 W. -Germany Horst Todt Sozia16konomisches Seminar Universitat Hamburg Von Melle-Park 5 2000 Hamburg 13 W. -Germany Michael Wegener Institut fur Raumplanung Universitat Dortmund Postfach 500500 4600 Dortmund 50 W.-Germany Hans Wiesmeth Wirtschaftstheoretische Abteilung II Universitat Bonn Adenauerallee 24-26 5300 Bonn 1 W.-Germany MICROECONOMIC ANALYSIS OF HOUSING MARKETS: TOWARDS A CONCEPTUAL FRAMEWORK Konrad Stahl* 1. Introduction The housing sector is of importance in virtually any economy for sever al reasons. First, housing is an essential consumption good eating up a large share of the typical household's budget. Second, housing is the major, if not the dominant asset in many households' portfolio. Third, housing production and maintenance constitute an important segment of the economy's productive sector. Indeed, the housing sector contributes, if not instrumentally, to the formation of business cycles. Finally, there is considerable public concern about the efficiency of allocation decisions in that sector, as well as about inequalities in the distri bution of housing consumption. In many countries, large public funds and many regulatory activities are devoted to the improvement of efficiency and equity in the allocation decisions in housing. It has been the subject of non ending disputes whether so much public concern justifiably concentrates on the housing sector. Many economists argue that it would perform at least more efficiently, if not equitably, if left alone. This argument rests on the often implicit hypothesis that the housing market performs closely to the neoclassical textbook market economists are accustomed to. This market, we know, does indeed perform efficiently. Thus, if housing markets would be structured, and would operate according to the many assumptions employed in that framework, then little could be said against the above conclusion concerning effi ciency. However, it seems quite obvious that housing markets do not operate that smoothly for many reasons, and that there are many sources for market failure. In that situation it must be of concern whether or not these markets do perform without intervention efficiently in a second best * I am grateful for perceptive comments by Wolfgang Eckart, Norbert Schulz and Jacob Weinberg on a first draft of this paper. 2 sense, i.e. under the constraints ~posed by the special characteristics of the housing commod~y,and the resulting peculiar behavioural atti tudes of the market agents; and whether public policies then indeed restrain the market from doing so, or else as intended lead to an ~ provement of market outcomes. All of this also has impacts on the evaluation of policies towards ~ proving inequalities in the distribution of housing consumption. The neoclassical economist looks at them with the "equity-efficiency-trade off" in mind, that is with the conception that implementing an inequality reducing policy always leads to efficiency losses.1 While this may be true in a first best situation, it no longer holds necessarily in a second best one. In such a world, it is perfectly possible to pursue with one single policy jOintly the achievement of equity, as well as efficiency objectives. In light of this discussion, we should set ourselves the following prin cipal objectives for a comprehensive analYSis of housing markets: (i) specification of the commodity characteristics and the behaviour of agents and markets that are peculiar to the housing sector; (ii) specification of the potential inefficiencies of housing market operations, including their magnitude, arising from these peculiaritiesl (iii) qualitative, as well as quantitative analysis of policy interventions in the housing market, and evaluation of these in light of efficiency as well as equity objectives. We stop far short of fulfilling this schedule in this paper or even this volume. Instead, we proceed only a modest step towards satisfying the first, and the second objective. As far as this introduction is con cerned,I will first elaborate upon the peculiarities of housing market operations. Then I will sketch some potential inefficiencies and market specific inequalities arising from these. The paper concludes with a comparison of the housing market models presented in this volume. Of course, a head tax policy would be inequality reducing with no cost on efficiency, but such a policy is virtually never enforceable. 3 2. Some Distinctive Features of the Housing Market The peculiarities of the housing market largely develop from the char acteristics of the commodity itself. While they are well known individ ually, their combined implications on the behaviour of market agents and of the market are often neglected. I shall discuss the commodity char acteristics first, and then derive consequences on the typical agents', and aggregate market behaviour. 2.1 The Commodity Space Together with labor, housing is one of the most heterogenous commodities traded in the market. Any two dwelling units may differ by as much as size, number of rooms, layout, or fittings, or by the size, architectural style, durability, or location of the structure containing them. In fact, no unit is identical to any other in every respect. Thus trading takes place in possibly very thin markets. Locational differences arise, because housing production is land inten sive. Also, housing is typically immobile. All this implies that housing is not exchanged at a few market-places as often goods are, but traded at more locations than any other commodity. Furthermore, since housing units differ by location, they also differ by the distances, costly to surmount, to reference locations in space relevant for production and consumption. The heterogeneity of housing is further induced by its high durability. Thus, at any point in time many housing vintages are available. The sub ject of exchange is the right to dispose for a certain finite, or an infinite period of time over services provided by a housing unit. The terms of this exchange are usually specified in rental, or purchase contracts, which themselves may be very heterogenous in nature. However itemized, they will never completely define the terms of exchange, leav ing aspects of provision and/or consumption at the discretion of the market agents involved. As a result of all this, it is very difficult to capture the heterogene ity of housing, let alone the terms of exchange of housing services in a formal conceptualization of the housing market. First of all there is the problem of measurability. While many characteristics of a dwelling 4 unit such as its size, age or location can be accurately described by continuously scaled variables, or by integer scales, such as number of (bath-) rooms or floor level at which the unit is located, or finally by nominal scales, such as type of heating, or floor cover, there are other characteristics such as layout or architectural style that are virtually not measurable at all. Hence it is impossible to accurately describe the typical commodity under analysis in all dimensions important for its production, marketing and consumption. Next, there is the problem of complexity: A description, even if confined to the scaleable characteristics of housing would have to assume a di mensionality far too high to handle within a transparent discussion of housing market phenomena. For example, consider the locational aspect. What counts is a dwelling unit's location relative to the points in space where other production or consumption activities take place. Ob viously, the set of such points is very large. Thus, we are faced with the problem of conceptually imperfect commodity description, but also with the necessity to select from the set of unequivocal descriptors an insufficienty small subset to work with. In conclusion, any formal description of the commodity space is problem atic.2 No matter whether we consider a continuum of (potential) commod ities, or a discrete set of commodity types, we are always confronted with noughty aggregation biases and index number problems. Any specifi cation can at best be appropriate for the description and evaluation of particular housing market phenomena. In turn, it appears important to check every result so derived for robustness against modified concep tualizations. 2.2 The Demand for Housing The consumer unit considered here is the household, and the unit of con sumption is the flow of services provided by a dwelling unit per unit of time. The terms of exchange are typically specified so that these services can be consumed only in their entirety per unit of time, that is, in indivisibZe amounts. In addition, a household usually consumes 2 The problems are virtually identical to those coming up when describ ing labor (services) as a commodity.
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