Clientele Effects on the Demand For Housing Price Appreciation

If house buyers are segmented by income, one might expect to observe buyers in such markets valuing the benefits of expected capital gain differently. Presumably, individuals experiencing higher marginal tax rates should be inclined to pay relatively more for anticipated capital gain since the opportunities of sheltering such income from taxation are greater. This paper attempts to identify a proxy for expected capital gain by using the hedonic price methodology to predict a recent price series for each housing unit in a sample of sales. That proxy is then used to determine an individual buyer's marginal willingness to pay for anticipated price appreciation. The results indicate that one cannot reject the joint hypothesis that homebuyers naively extrapolate from prior implied price performance to establish future price expectations and the variation in willingness to pay for that expectation may be a function of the buyer's income. This suggests the existence in housing markets of a phenomenon termed the clientele effect. This effect has been the subject of considerable examination in the finance literature.