Cardiff – Social status and the demand for housing

Social status and the demand for housing Alex Marsh

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Preliminaries

• Exciting times for housing and the economy

• Implied audience

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Where we’re going ... • Relativities and social status in economic thinking • Relativities in the economics of housing • Implications • Identification

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• “a great portion of the expenses of the higher and middle classes in most countries, ... , is not incurred for the sake of the pleasure afforded by the things on which the money is spent, but from regard to opinion, and an idea that certain expenses are expected from them, as an appendage of station.” • (J.S. Mill, 1848, The Principles of Political Economy, Book 5 Chapter VI.2)

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• “One reason why the interpersonal effects on demand have been ignored in current texts may be the fact that Marshall did not consider the matter in his Principles. We know, however, from Marshall's correspondence, that he was aware of the problem. Both Cunynghame and Pigou pointed out that Marshall's treatment of consumers' surplus did not take into account interpersonal effects on utility. Marshall seemed to

feel that this would make the diagrammatical treatment too complex.” •

Leibenstein, H. (1950) Bandwagon, snob and Veblen effects in the theory of consumers’ demand, QJE, p186.

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Leibenstein’s classification of demand • A. Functional • B. Nonfunctional – 1. External effects on utility • (a) Bandwagon effect • (b) Snob effect • (c) Veblen effect

– 2. Speculative – 3. Irrational

• (1950, p188)

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Hirsch on the positional economy

• “The positional economy ... relates to all aspects of goods, services, work positions, and other social relationships that are either (1) scarce in some absolute or socially imposed sense or (2) subject to congestion or crowding through more extensive use.”

• (Hirsch, 1977, The social limits of growth, p27)

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This isn’t a new issue for those thinking about the economics of housing • “Although social scientists, and particularly sociologists, have long recognised that individuals make group decisions and that goods may impact status, with status increasing with price per se, economists have made little attempt to analyse such potentially important characteristics of housing” • (Maclennan, 1982, p47)

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Re-emerging issue? • O’Sullivan and Gibb (2003, p2): – “Demand for ‘housing’ in the real world ... reflects the fact that housing is in part at least a ‘positional good’”

• Bramley et al (2008, p180) – “House prices appear to be quite strongly related to the social status of neighbourhoods. There are many overlapping explanations for this: unmeasured quality variation in the houses, better schools, less crime, nice gardens or better maintenance. Whatever it is, it is going to be reinforced by the demand side/affordability factor— only the better-off can afford to live in a high price area— and by any tendency to ‘positional competition’”

Housing as a consumption good • Tastes and preferences taken as given – De gustibus non est disputandum • Utility derived from the characteristics of the dwelling • The ‘characteristics’ typically start with dwelling structure and accessibility but then add a range of neighbourhood variables including local amenities, public goods, and social environment. • Hedonic price studies • Submarket studies

Housing as an investment good • Housing market as an asset market • Resource allocation to, and timing of, investment; tenure switching • Efficient market or otherwise

Relativities are back on the agenda • Happiness and economics – The Easterlin paradox – Relativities and reference levels in consumption • Behavioural economics: – Nonstandard preferences – Nonstandard beliefs – Nonstandard decision making – (DellaVigna, 2009, Journal of Economic Literature)

The positionality of housing • Distribution of sensitivities to relative consumption • Observability/Signalling • Cars and Housing more positional than Insurance and Vacations • Some respondents positional on all goods • Alpizar, Carlsson and Johansson-Stenman (2005) How much do we care about absolute versus relative income and consumption?, Journal of Economic Behaviour and Organization, vol 56.

Reference-dependent preferences • Standard economics assumes that welfare is a function of absolute levels of consumption • An alternative is to see preferences and welfare as dependent (in part) on reference levels

• ‘Keeping up with the Jones’

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Housing scenarios • • Scenario A • • You live in a onebed apartment in the desirable Marina quarter • Your friends all live • in bedsits with shared facilities just across the road

Scenario B You live in a two-bed apartment in the desirable Marina quarter Your friends all live in three bed townhouses in an exclusive recently-developed Maritime complex

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Implications • Overconsumption of the good that is acting as a status signal (relative to the ‘functional’ level of consumption)

• Status races – The “positional arms race”

• (Progressive) taxation of the consumption of status goods – Environmental payoff?

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Implications? • Dynamics and housing market cycles – Fundamentals versus ‘irrational exuberance’ – Rational versus irrational • ‘Non functional’ status demand as cyclical?

– Turning points • Responses • Social multiplier (Shifting the frame of reference)

• Rational • Conveys information • Move before priced out of the market

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Identification

• Identification and formation of peer groups – Selection effects

• Experimental versus field data

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Causality/interpretation (following Manski, 1993) • endogenous interactions: the propensity of an agent to behave in a certain way varies with the behaviour of the group members, • exogenous (contextual) interactions: the propensity of an agent to behave in some way varies with the exogenous characteristics of the group members, • correlated effects: agents in the same group tend to behave similarly because they have similar individual characteristics or face similar institutional environments.

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“Men do not desire to be rich, but richer than other men” (J S Mill) • The examination of interdependencies in consumption is becoming increasingly common • This significantly affects results • We recognise that consumption and investment motives generate complexity in housing demand • Relativities in housing are recognised informally, but not explored very extensively in theory or empirically

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• There are significant empirical challenges (both in terms of data and technique) in disentangling social interaction effects from other components of demand. • Unnecessary complexity?

• It is an area that offers considerable potential for developing our understanding of housing market behaviour

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• A summary of this paper will be posted on my blog later today/tomorrow: http://alexsarchives.wordpress.com • It will link through to these powerpoint slides

• Feel free to comment there (on this or any other post)