The impact of cultural diversity on the German housing market

This paper documents a positive impact of cultural diversity and cultural similarity on rental prices of the German districts for the years between 2004 and 2013. On the one hand, an increase of the Herfindahl index as a measure for cultural diversity of 0.1 would increase rents by over 12 percent after controlling for relevant explanatory variables and city and time fixed effects. On the other hand, an increase in the share of foreign-born individuals is associated with a decrease in rents. These results suggest an economic impact that is an order of magnitude bigger than that found in labor markets. Consequently, cultural diversity can be considered as a city-specific consumption amenity. The positive impact of cultural diversity on the local housing market mirrors the fact that inhabitants are willing to pay higher rents in cities with a high level of diversity. Natives prefer to live in culturally diverse areas, but they avoid to reside in areas where the share of foreigners is too high. These findings show that amenity considerations play a role in residential location decisions.