Explaining the spatial variation in housing prices: an economic geography approach

Housing prices vary geographically, even between neighbouring municipalities. Local differences can be attributed to differences in socio-economic variables and real estate characteristics. This article argues that one should additionally take into account the geographical location of municipalities. In particular, housing prices are affected by distance and travel-time to important economic centres offering jobs and extensive services. Following the economic geography literature, we develop a model showing the explicit impact of geographical barriers on housing prices. As such, we distinguish ourselves from the existing literature on the dynamics of housing prices since geographical elements are fairly constant over time. We estimate our model on municipality-level housing prices for all 589 Belgian municipalities in 2001. We also differentiate between the two main regions of Belgium (Flanders and Wallonia). Our empirical results confirm expectations. Geographical barriers have significantly negative effects on housing prices. Nevertheless we find important differences between the Belgian regions and the means of transport considered.