Table Of ContentLecture 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
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© 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.
