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Adaptation investments and homeownership

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  • Hansen, Jørgen Drud
  • Skak, Morten

Abstract

This article develops a model where ownership improves the efficiency of the housing market as it enhances the utility of housing consumption for some consumers. The model is based on an extended Hotelling-Lancaster utility approach in which the ideal variant of housing is obtainable only by adapting the home through a supplementary investment. Ownership offers low costs of adaptation, but has high contract costs compared with renting. Consumers simultaneously choose housing demand and tenure, and because of the different cost structure only consumers with strong preferences for individual adaptation of the home choose ownership. This article analyses the consumer's optimization. The model provides an explanation for the observation that homeowners typically live in larger dwelling units than tenants. It also provides an explanation for a high price of housing services tending to reduce homeownership rates.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Housing Economics.

Volume (Year): 17 (2008)
Issue (Month): 1 (March)
Pages: 102-115

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Handle: RePEc:eee:jhouse:v:17:y:2008:i:1:p:102-115

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Web page: http://www.elsevier.com/locate/inca/622881

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  1. Hans-Werner Sinn, 2000. "EU Enlargement, Migration, and Lessons from German Unification," German Economic Review, Verein für Socialpolitik, vol. 1(3), pages 299-314, 08.
  2. Swan, Craig, 1984. "A model of rental and owner-occupied housing," Journal of Urban Economics, Elsevier, vol. 16(3), pages 297-316, November.
  3. Smith, Lawrence B & Rosen, Kenneth T & Fallis, George, 1988. "Recent Developments in Economic Models of Housing Markets," Journal of Economic Literature, American Economic Association, vol. 26(1), pages 29-64, March.
  4. Ortalo-Magne, Francois & Rady, Sven, 2002. "Tenure choice and the riskiness of non-housing consumption," Journal of Housing Economics, Elsevier, vol. 11(3), pages 266-279, September.
  5. Black, Dan & Gates, Gary & Sanders, Seth & Taylor, Lowell, 2002. "Why Do Gay Men Live in San Francisco?," Journal of Urban Economics, Elsevier, vol. 51(1), pages 54-76, January.
  6. Henderson, J Vernon & Ioannides, Yannis M, 1983. "A Model of Housing Tenure Choice," American Economic Review, American Economic Association, vol. 73(1), pages 98-113, March.
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Cited by:
  1. Bloze, Gintautas & Skak, Morten, 2010. "Homeownership and subjective well-being," Discussion Papers of Business and Economics 5/2010, Department of Business and Economics, University of Southern Denmark.
  2. Bloze, Gintautas & Skak, Morten, 2011. "Homeownership and ill-being," Discussion Papers of Business and Economics 5/2011, Department of Business and Economics, University of Southern Denmark.

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