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Adaptation investments and homeownership

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This article develops a model where ownership improves the 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 choose 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 an explanation for a high price of housing services tending to reduce homeownership rates.
Original languageEnglish
JournalJournal of Housing Economics
Volume17
Issue1, mar
Pages (from-to)102-115
ISSN1051-1377
Publication statusPublished - 2008

    Research areas

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

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ID: 32359353