C. Housing Prices and Residential Land Use

• Hedonic approach - dwelling is a bundle of attributes

• Dwellings differ in physical characteristics and accessibility to jobs and other features

• Ex. - Dwelling size, job access, school quality, air quality, crime

• Focus on job accessibility

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1.  Housing price curve

• Indicates how much households are willing to pay for dwellings at different locations

• Price is per unit of housing services

• Assume commuting is to a job in the center of city (Central Business District - CBD)

• Jobs actually widely distributed throughout metropolitan area

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a. No consumer substitution

• Dwelling size is fixed

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• Tradeoff between commuting costs and housing costs

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b. Consumer substitution

• Housing consumption depends on price of housing (Law of Demand)

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(1)  Inward move

• Housing price increases

• Less housing consumed, substitute into other products

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(2)  Outward move

• Housing price decreases

• More housing consumed, substitute away from other products

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(3)  Algebraic approach

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c. Price of residential land

• Amount housing producers (developers) are willing to pay for land

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(1)  Leftover principle

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(2) Impact of higher prices

• Leads to higher price for land

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(3)  Residential bid-rent function

• Amount housing producers (developers) are willing to pay for land at different locations

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d.  Population density

(1) Impact of land price

• Density increases land price increases

- Consumer substitution - more housing consumed as price declines

- Input substitution - more land per unit of housing is used as land prices drop

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(2)  Population density within cities

• Density decreases as distance to the city center increases

• Due to decreasing housing and land prices

• Ex. - Boston

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(3)  Population density across cities

• In U.S., higher density in western cities, due to relatively high land prices

- Ex. - Los Angeles (21 people per hectare), Phoenix (18), Chicago (15), Boston (14)

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• Globally, Asian cities have the highest density, U.S. cities the lowest

- Ex. - New York City (40), Paris (85), Barcelona (160), Shanghai (303)

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