Estimating the Demand for Housing, Land, and Neighbourhood Characteristics

TLDR

The study estimates the demand structure for housing attributes and land in two British cities and introduces an instrumental‑variable selection method to address hedonic‑model criticisms. Using a hedonic price function, the authors derive implicit attribute prices, construct city‑specific demand systems, and apply the IV selection technique to improve estimation. The approach yields accurate price and income elasticities, produces estimates close to conventional methods, and highlights the impact of land‑use constraints and income distribution on the British housing market.

Abstract

This paper provides estimates of the structure of demand for individual housing and neighbourhood characteristics and for land in two British cities. We estimate a hedonic price function, and from this obtain the implicit prices of house attributes. These prices are used to estimate a demand system for each city. These perform well, and enable us to calculate price and income elasticities for each of the non‐dichotomous characteristics and for land. To counteract criticisms of demand estimates derived within the hedonic framework a method is developed for selecting an appropriate set of instrumental variables. Estimates derived from this method, however, differ only slightly from those obtained using the conventional techniques. Several features of these estimates provide insights into the unusual characteristics of the British housing market, the effects of constraints imposed by land use planning, and the effects of changing income distribution on the structure of demand.