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Income Inequality, Neighborhoods, Prices and the Liquidity of Housing


  • Huw Lloyd-Ellis

    (Queen's University)

  • Derek Stacey

    (Ryerson University)

  • Allen Head

    (Department of Economics)


A model of a city comprised of heterogeneous neighborhoods featuring different levels of amenities, populated by households differing in income and preference for housing services is developed. Houses are constructed by a competitive development industry and either rented or sold to households through a process of competitive search. Along a balanced growth path, both the composition of the city and the rate of home-ownership depend on the distribution of income and construction costs. Higher income households live in better neighborhoods and are more likely on average (but not strictly so) to be homeowners than lower income ones. Due to search, houses sell at liquidity discounts associated with expected time on the market. The relationships between these discounts and both house prices and neighborhood quality depend on the distribution of income through its effect on the composition of the city, both with regard to the relative sizes of neighborhoods and the rate of home-ownership overall.

Suggested Citation

  • Huw Lloyd-Ellis & Derek Stacey & Allen Head, 2014. "Income Inequality, Neighborhoods, Prices and the Liquidity of Housing," 2014 Meeting Papers 1163, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:1163

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