The dynamics of regional housing markets : topics : quality heterogeneity, sorting and housing affordability

Abstract

There are several reasons why housing markets are different from other economic markets. Housing markets are fundamentally local. The dynamics of these markets are significantly influenced by factors that vary spatially, such as local economic activity, regional policies, and the level of amenities. This is largely attributed to the immobility of houses, unlike many other goods. While housing markets are known to be aligned with macroeconomic factors like interest rates and local incomes, the microeconomic aspects of housing have become increasingly relevant in housing market research. Another prominent feature is that houses are vastly heterogeneous in their qualities, and many aspects of this quality is unobserved in research and economic models. Furthermore, housing markets primarily function as search markets, with households typically making choices based on housing quality rather than quantity.

This thesis addresses some of these aspects of housing markets. It measures the renovation quality of transacted houses and investigates whether households search more intensively for low-quality housing during booms. It also explores whether households sort differently by income in amenity-rich and amenity-poor cities compared to the larger urban area. Market frictions and fluctuations in buyer-seller ratios, location amenities, and policy measures can all contribute to the housing market equilibrium and the sorting of households. Moreover, housing affordability issues has become a main policy objective in many countries struggling with soaring housing prices.

Paper I aims to measure the renovation level of houses transacted using real estate listings and prospectuses in urban housing markets and estimate the market premium of renovation. We find a significant positive premium of 5-7 percent for renovated dwellings and a negative premium of 9-10 percent for unmaintained dwellings. Interestingly, these premiums vary significantly over time, exhibiting a counter-cyclical effect. Ignoring renovation information biases short-term house price growth estimates downward, a crucial insight for those monitoring housing market trends.

Building on this, Paper II studies ripples of housing search between different housing quality tiers during booms and busts. Overall, these findings point to a trade-off between quality and location. To maintain a better location quality, more buyers may be willing to reduce unit quality. Since most cities' housing markets are complex systems with spatial patterning of housing qualities and price levels, our findings support that variations in the demand for quality during booms and busts is a fundamental driver of variations in house price growth within and across neighborhoods and housing quality tiers.

Paper III investigates household location choices by income within city regions. Our approach emphasizes the importance of location quality differences and amenity concentration for hypotheses about the income-distance gradient. Although their concentration may be related in a complex way to other fundamental drivers, our findings reinforce the importance of amenities for household location choice. In line with theory, we estimate an inverse relationship between the degree of amenity-superiority of the city center and the income - distance gradient. Our estimates also support that more households respond by relocating to the city edge in response to increased access to public transportation and lower taxes at the city edges. These insights have significant implications for the amenity-based sorting literature and local urban planning.

Finally, Paper IV construct standardized measures for the housing affordability of representative first-time buyers in regional housing markets. This method provides multiple gains compared to simpler measures that are often used, such as price-income rates, and is also suited to regular updates. It also compares the estimates to actual first-time purchases in these markets. These results suggest that housing affordability has significantly decreased over the last decade, with many young people stretching their finances to enter the market.