Using a microeconomic model of housing demand, we show that the effect of price increases on demand depends on whether a household trades up or down the property ladder. For a household that trades up the cost effect of a price increase typically outweighs the capital gains effect of such an increase. For a household that trades down the reverse might hold which can lead – in contrast to the standard model of consumer demand – to an upward sloping housing demand curve. This result is in line with the idea that housing is both a consumption and investment good and occurs even in the absence of down-payment constraints and nominal loss aversion. Nested logit regressions of residential mobility on housing capital gains support these findings.
Dröes, Martijn. "Why Are Housing Demand Curves Upward Sloping?" In 25th Annual European Real Estate Society Conference. ERES: Conference. Reading, UK, 2018.
Section: Refereed session