Working Paper: NBER ID: w13704
Authors: Edward L. Glaeser; Joseph Gyourko
Abstract: Urban economists understand housing prices with a spatial equilibrium approach that assumes people must be indifferent across locations. Since the spatial no arbitrage condition is inherently imprecise, other economists have turned to different no arbitrage conditions, such as the prediction that individuals must be indifferent between owning and renting. This paper argues the predictions from these non-spatial, financial no arbitrage conditions are also quite imprecise. Owned homes are extremely different from rental units and owners are quite different from renters. The unobserved costs of home owning such as maintenance are also quite large. Furthermore, risk aversion and the high volatility of housing pries compromise short-term attempts to arbitrage by delaying home buying. We conclude that housing cannot be understood with a narrowly financial approach that ignores space any more than it can be understood with a narrowly spatial approach that ignores asset markets.
Keywords: No keywords provided
JEL Codes: R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| location desirability (R21) | housing prices (R31) |
| maintenance costs (R42) | house price-to-rent ratio (R31) |
| risk aversion (D81) | house price-to-rent ratio (R31) |
| expected price growth (E30) | house price-to-rent ratio (R31) |
| financial no arbitrage condition (G19) | predictable excess returns from owning relative to renting (R21) |
| indifference relationships between owning and renting (R21) | evaluation of housing prices (R31) |