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Why Are Housing Demand Curves Upward Sloping?

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  • Martijn Dröes

Abstract

Using a microeconomic model of housing demand, we show that the effect of price increases on demand depends on whether a household trades up or down the property ladder. For a household that trades up the cost effect of a price increase typically outweighs the capital gains effect of such an increase. For a household that trades down the reverse might hold which can lead – in contrast to the standard model of consumer demand – to an upward sloping housing demand curve. This result is in line with the idea that housing is both a consumption and investment good and occurs even in the absence of down-payment constraints and nominal loss aversion. Nested logit regressions of residential mobility on housing capital gains support these findings.

Suggested Citation

  • Martijn Dröes, 2018. "Why Are Housing Demand Curves Upward Sloping?," ERES eres2018_267, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2018_267
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    References listed on IDEAS

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    More about this item

    Keywords

    decomposition; housing capital gains; Housing demand; residential mobility; upward sloping demand curves;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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