Housing and Urban Land Markets

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 Objectives: At the end of this chapter students will be
able to:
 Explain economic reasons responsible for the existence
of cities within regions.
 Discuss the fundamental reasons for Clusters and
Agglomeration.
 Understand the determinants of local productivity.

 Know the economic factors generating cities of different

sizes and growth.
 Know the determinants of the competitiveness of cities

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 Section I: Neighborhood Choice, Segregation and
Sorting
 Neighborhoods
 Itis a small unit which serves the local community
and encouraged them to foster a neighborhood spirit
or relationship which seems to have been lost in
modern life.

 A neighborhood is a geographic community in a larger

city, town or suburb.
 Neighborhoods are often social communities
because the people that live in them commonly talk
with each other.
 Neighborhood-level factors have been found to be the
strongest determinants of household location choice.
 Among the neighborhood-level factors: crime,
property tax, median housing value and
school quality exerted the largest influence on
household location decisions.

 Households can only choose to live in a particular

neighborhood when there are vacancies available.
 Financial resources are an important driver of
neighborhood choice.
 Therefore, households sort into neighborhoods
according to socio-economic characteristics (income,
education, employment status, use of benefits).
 Neighborhood choice has been associated with the ethnic
composition of the neighborhood population.
 These preferences can lead to highly segregated
neighborhoods.

 Ethnic segregation is primarily driven by own-group

preferences held by the majority population.
 Ethnic segregation is the enforced or voluntary
residential separation of two or more groups on the basis
of cultural identity.
 The other cause of residential segregation is growing in
income inequality:
 In this case the residential sorting are
typically mechanically related to the income
distribution.
 Section II: Urban Housing
 Housing is also an essential component of living standard,
comfort, security and social status.
 Housing is a unique commodity in that it affects a major
portion of any household's annual income.
 Housing is one of the largest categories of privately-
owned assets as well as one of the most durable.
 People devote large shares of their income and time to
housing activities.
 Much of energy goes into acquiring, financing,
maintaining, insuring and repairing homes.
 Housing will therefore not include informal settlements
without any form of public services.
 Housing is distinguished by five characteristics.
 Heterogeneity: dwellings/ houses differ in size, age, style,
features, cost, space, location, appearance, rooms, access to
transportation and social composition of the neighborhood.
 Immobility: Once a housing unit is constructed it is almost
impossible to move and very expensive to demolish or to
replace it with some other housing unit.
 Durability: Housing can last for a very long period of time
and expectations about future market conditions will
strongly influence decisions by prospective homeowners.
 High expense relative to income: depending on its location
and amenities .
 Large adjustment costs: It is expensive for a household to
move and therefore households will adjust their housing
only if the benefit of doing so is very high.
 Demand For Housing
Factors influencing housing demand
 The cost of a particular housing unit is assumed to be of two kinds.
 Firstly, the price of the housing unit itself and
 Secondly, the accessibility costs associated with the residential location
as well as the sites to which the household commonly travels.

 Additional factors explaining housing demand include:

 Employment locations,
 Availability of public services such as schools,
 The quality of the environment both in physical and social terms and
 The accessibility to other consumption goods

 In short term demand for housing largely depends on: household

income, expectation income and of cost and availability of finance
 In Long-run demand for housing depends on: size and age
distribution of the population, the magnitude and distribution of income
and the relative prices of housing services
  Factors influencing housing prices and values and ultimately the
residential location decision will now be listed as

Positive Effect Negative Effect

Neighborhood income, size of houses, Crime rate in the area
Quality of houses Property tax rate
Employment location Air pollution
Quality of local school Airport noise
Physical environment proximity to a Proximity to contaminated areas
Park Proximity to power plants
Proximity to highway interchange Industrial noise
Distance to public transportation Traffic noise
Existence of zoning or restrictive Location in a floodplain
Regulation versus their absence Distance to employment
Distance to shopping
Distance to airport
Adjacent to railway
 Factors affecting an individual’s choice of housing
Social Factors
 Household size
 Children’s ages
 Special needs
 Location
 Personal preference
 Proximity to amenities
 Proximity to work
 Availability of transport
Economic Factors
Renting or buying
 Cost of house - salary to meet
costs
 Re-sale value
 Cost of insurance
 Cost of furnishing,
 maintenance, service charges
 Legal costs
 Stamp duty
 Extensions
 Detached, semi or terraced, etc.
 Section III: Housing Affordability and Homelessness
 Safe, affordable housing is a basic necessity for every
family.
 Without a decent place to live, people cannot be
productive, children cannot learn and families cannot
thrive or prosper.

 Households spend the largest share of their budget on housing.

 In many countries, housing costs are high and have
increased in recent years.
 Although there are considerable differences within
countries, house prices have increased three times
faster than household median income over the last two
decades.
 Affordable housing is a top policy concern of
governments and citizens.
 housing affordable to individuals and families costs
no more than 30% of the household’s income.
 For example: With a monthly income of $6,000. If
you pay more than $1800/month (30%): Cost
Burden.
 If you pay more than $3,000/month (50%): Severe
Cost Burden.

 Renters and low-income households face a significant

housing burden.
 On average, renters spend a bigger share of their
disposable income on housing costs, relative to
owners with a mortgage.
Criteria of Affordable Housing
1. Minimum Volume of Habitation: Space is limited in cities to meat the
demands for public housing. Apartment buildings are favored
(Vertical expansion)
2. Provision of Basic Amenities:
 Sanitation and basic water supply
 Parks, schools and healthcare facilities within the neighborhood or
surrounding area
3. Location of house:
 Can negatively impact a city by increasing the stress on public
transportation
 Affects affordability of the household if located far away from a
workplace
4. Cost of the House
 Purchase cost
 Maintenance cost
 Sustainability
Policy directions to make housing more affordable
 Incentivizing construction overall, including affordable and social
housing
 Direct housing construction

 Reforms to housing taxation

 Means-tested housing allowances and other financial support to

households
 Targeted housing support (e.g. young people, families with children,
first-time homebuyers, households in financial distress...)
 Reforms to rental regulations

 Reducing local barriers to affordable housing development (e.g.

reforms to planning processes, building and zoning regulations…)
 Policy Mechanism for Affordability
There are several ways to address this goal.
1. Supply-Side Mechanisms
 Public Housing
 Low Income Tax Credits
 New Market Tax Credits
2 Demand-Side Mechanisms
 Vouchers
3. Regulation, Zoning & Preservation (also a supply-
side factor by reducing supply)
 Rigid historical preservation laws
 Minimum lot size restrictions
 Mandatory minimum parking
 Public Housing
 Public housing is housing that is owned and/or managed
by the government for the purpose of providing housing to
low-income families.
 Public housing is wholly dedicated to qualified low-income
households and/or those with qualifying disabilities.
 To determine a family’s eligibility to live in public housing,
the government evaluates income and expenses compared
to the local average.

Low Income Housing Tax Credits

 Introduces some elements of market discipline to public
housing.
 Developers may receive a tax credit from the government
[known as the Low Income Housing Tax Credit (LIHTC)]
 Private developers are subsidized to build affordable
housing units (tax credits).
 New Market Tax Credits
 Tax credits to support businesses in distressed
communities.
 Channeled through Community Development Entities
(induces public private partnerships).
 Investments made in grocery stores, hospitals, charter
schools, and other businesses that help poor communities
but are high-risk because of their location.

Housing Vouchers
 Program participants pay 30% of income towards housing,
and the rest is subsidized by the government.
 Landlords apply to be part of the program and must pass an
inspection to ensure minimum quality standards.
 Affordability Index
 An affordability index is a measure of an average person's
ability to purchase a particular item, such as a house, in a
particular region.
 As housing is often one of the largest expenses a
family faces, a housing affordability index is seen as an
overall indication of the costs of living in that area.
 Housing affordability indexes often compare the cost of
purchasing a home in different locations.
 An affordability index uses the value of 100 to
represent the position of someone earning a
population's median income, with values above
100 indicating that an item is less likely to be
affordable and values below 100 indicating that an
item is more affordable.

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Section IV: Urban Land Use Patterns, Market and Policy
 Urban land use is determined by the various decisions
made by firms, House-holds, and the government (primarily
local authorities).
 The urban economy comprises three basic markets: the
urban land market, the urban capital market, and the urban
labor market.
 These markets are inexorably linked and dependent on each
other.
 Of these markets the land market most directly affects the
urban environment and the quality of life in cities.
 The price of land, like the prices of other goods, is determined
by the interaction of supply and demand in the market.
 In the sense that the total supply of land is fixed, the price of
land can be regarded as being determined by demand alone.
 Land is limited in supply (for spatial reasons), especially land
in the centre of an urban area.
 Nevertheless the supply of sites for anyone use cannot be
regarded as being completely inelastic.
 since alternative, although less-preferred, locations exist
as we move outwards from the centre
 The demand for land is derived from demand for output (e.g.
housing, corn).
 The price of land is high because the demand for out put is
high.
 Expensive land is the result-not the cause- of expensive output.

 Demand for land by firms and households for a

particular location depends upon the expected net
revenue yield/utility.
 The accessibility determines profitability and utility of Land.
 Accessibility - the advantages of a particular urban location
in terms of movement, convenience and amenity.
 Types of accessibility: general accessibility and special
accessibility.
 General Accessibility- the advantage of a particular location in
terms of the movement costs (including time) it avoids and the
revenue-earning capacity (including convenience) it affords.
 General accessibility is largely dependent upon transport
facilities.
 Many business users find that the centre of the urban
area, the central business district (CBD) affords the
greatest accessibility.
 Special accessibility- within the pattern of urban land use
produced by general accessibility, there is a 'clustering' of shops and
activities.
 Models of Urban Land Use
1-Concentric Zone Model
 The concentric zone model was among the early
descriptions of urban form.
 The model depicts the use of urban land as a set of
concentric rings with each ring devoted to a different
land use.
 The model was based on Burgess’s observations of
Chicago during the early years of the 20th century.
 Major routes of transportation emanated from the
city’s core, making the CBD the most accessible
location in the city.
 Burgess identified five rings of land use that would
form around the CBD.
 Burgess described the changing spatial patterns of residential areas
as a process of "invasion" and "succession".
 As the city grew over time, the CBD would face outward expansion
 As the city grew and the CBD expanded outward, lower status
residents moved to adjacent neighbourhoods, and more affluent
residents moved further from the CBD.
2-Sector Model
 Soon after Burgess generalized about the concentric
zone form of the city, Homer Hoyt re-cast the
concentric ring model.
Hoyt's sector model is simply a concentric zone
model modified to account for the impact of
transportation systems on accessibility.
 Most major cities evolved around the nexus of several
important transport facilities such as railroads, sea
ports, and trolly lines that emanated from the city's
centre.
 Hoyt theorized that cities would tend to grow in
wedge-shaped patterns, or sectors, emanating from
the CBD and centred on major transportation routes.
3-Multiple Nuclei Model
 It is an urban form that has several nodes, or centers of
commerce with each node surrounded by a set of rings
of different land uses.

 Cities of greater size were developing substantial

suburban areas and some suburbs, having reached
significant size, were functioning like smaller business
districts.

 These smaller business districts acted as satellite

nodes, or nuclei, of activity around which land use
patterns formed.
 Zoning
 Zoning is the process of dividing land in a municipality
into zones (e.g. residential, industrial) in which certain
land uses are permitted or prohibited.
 Zoning is a technique of land-use planning as a tool
of urban planning used by local governments in most
developed countries.
 Land zoning is how local governments, such as city councils,
restrict the physical development and use of specific parcels
of land. A parcel of land is best described as a piece or an area
of land that is zoned for a designated purpose.
 Zoning regulations can be used to separate business from
farming or residential areas, protect natural resources and
wildlife, designate lot sizes or regulate the types of animals
owned by landowners.
Types of Zoning
 Euclidean zoning: is characterized by the segregation of land
uses into specified geographic districts and dimensional
standards stipulating limitations on development activity
within each type of district.
 Performance zoning: uses performance-based or goal-oriented
criteria.
 Performance zoning is intended to provide flexibility,
rationality, transparency and accountability, avoiding the
arbitrariness of the Euclidean approach and better
accommodating market principles and private property
rights with environmental protection.
 Incentive zoning: is intended to provide a reward-based
system to encourage development that meets established urban
development goals.
 Form-based Zoning: offer considerably more governmental
latitude in building uses and form than do Euclidean codes.
Form-based zoning regulates not the type of land use, but the
form that land use may take.
 Section V: Hedonic Pricing of Houses
 Hedonic pricing is most often seen in the housing market,
wherein the price of a piece of real estate is determined by the
characteristics of the property itself.
 Hedonic pricing only captures a consumer's willingness
to pay for what they perceive are environmental
differences.
 The hedonic price method uses the value of a surrogate
good or service ( proxy or substitute) to measure the
implicit price of a non-market good.
 HPM is most commonly applied to variations in
housing prices that reflect the value of local environmental
attributes.
 House and other property prices are not simply determined by
one variable as listed in the above examples. They are a product
of a number of factors including:
 Characteristics of the property.
 Characteristics of the location.
 Characteristics of the environment.
 The hedonic price method is used to measure the relative importance –
through use of regression analyses – of these independent ‘explanatory’
variables on house and property prices.
 The hedonic regression analysis is conducted in two steps. The first step
estimates the relationship between the price of an asset (the dependent
variable) and all of its various characteristics (independent variables).
For example, the price of a house can be summarized using a hedonic
price function as below:

 Where the price of a house (P), is a function of its location relative to a local
urban centre (LOC), the type of house (TYPE), the size of the plot (SIZE),
the quality of its view (VIEW), and neighborhood characteristics (NEIGH)
such as school quality and crime.

P = 0 + 1 (Loc) + 2 (Type) + 3 (Size) + 4 (View) + 5 (Neigh)

 Here the parameters 1 to 5 are elasticities.

 There are a number of limitations in the use of the hedonic pricing
method. These include:
 Information: the model requires that all individuals have prior
knowledge of the potential positive and negative externalities
they may face having purchased a house.
 Measurement validity: the quality of the measures used in the
independent ‘explanatory’ variables is of key importance. If
proxy measures are used, for example for the build quality of a
house, this could result in an inaccurate coefficient being
generated in the regression analyses.
 Market limitations: the model ideally requires that a variety
of different houses are available so that individuals are able to
obtain the particular house of their choosing, with a
combination of characteristics they desire. However, in reality
it may be the case that a family wishing to purchase a large
house with a garden in a busy city centre location, may find
that the city centre only contains small houses, or houses
without gardens.
 Multicollinearity: it may be the case that large houses
are only found in green areas with low pollution, and
small houses are only found in urban areas with high
pollution. In this case it would be impossible to separate
out pollution and house size accurately.

 Price changes: the model assumes that market prices

adjust immediately to changes in attributes. In reality
there will likely be a lag associated with this, especially
in areas where house sales and purchases are rare
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