Adaptation investments and homeownership

Jørgen Drud Hansen, Morten Skak

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

This article develops a model where ownership improves 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 decide 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 and explanation for a high price on housing services tending to reduce homeownership rates.
Original languageEnglish
JournalJournal of Housing Economics
Volume17
Issue number1
Pages (from-to)102-115
ISSN1051-1377
Publication statusPublished - 1. Mar 2008

Keywords

  • Homeownership rates
  • Housing consumption
  • Individual adaptation
  • Contract costs
  • Housing demand
  • Tenure choice
  • Dwelling size
  • Ownership probability
  • Housing investments
  • Housing preference

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