Housing Demand, Coping Strategy, and Selection Bias

ABSTRACT In conventional modeling of housing demand, consumers choose living arrangement, tenure, and housing on the basis of price, income, wealth, and tastes. However, it is both costly and onerous to alter one's housing conditions. It is argued therefore that consumers employ housing strategies to cope with labor market risks and expectations about their future: strategies that may differ from one demographic group to the next. In conventional modeling of housing demand, it is also well‐known that selection bias can arise: that is, omitted variables that help account for one aspect of housing (say, tenure choice) also subsequently affect the nature of the demand function for other aspects of housing demand (say, the amount spent on housing by a renter household). One such variable is the consumer's wealth, a variable that is typically not available in household survey data. This paper argues that the most important variables that may give rise to selection bias are variables that also reflect the coping strategies employed by consumers. The paper estimates a model of housing choice using Canada‐wide pooled samples from the 1980s and 1990s. In this paper, the prices of housing services and income prospects vary region by region. The paper shows how individuals and families in different housing markets across Canada respond, and how this evidences the use of coping strategies (from doubling up to substandard housing). The paper presents evidence to support the argument that selection bias is important in understanding how consumers cope.