ISSN (Print) 0473-453X

Discussion Paper No. 1234

ISSN (Online) 2435-0982

REAL ESTATE MARKET:AN URBAN PERSPECTIVE

Charles Ka Yui Leung

March 2024

The Institute of Social and Economic Research
Osaka University
6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan

Real Estate Market: An Urban Perspective

Charles Ka Yui LeungThis version: March 2024

Abstract
This short article provides a quick summary of an urban perspective of the real estatemarkets. Some new developments are also discussed.

Keywords: commute cost, housing cost, segregation, self-sorting.

JEL classification Number: J40, R20, R30.

Acknowledgement: This article is prepared for The World of Regional Science, edited byPeter Nijkamp, Karima Kourtit, Kingsley Haynes and Zeynep Elburz, to be published byEdward Elgar. I am very grateful to many colleagues who shaped my thoughts on the topic,
especially Marcus Berliant, Nan-Kuang Chen, Yifan Gong, Rick Hanushek, Steve Malpezzi,
Francois Ortalo-Magne, Edward Tang, Chung Yi Tse, Ping Wang, Kuzey Yilmaz, among
others. The usual disclaimer applies.
Department of Economics and Finance, City University of Hong Kong, Kowloon Tong,Hong Kong. kycleung@cityu.edu.hk

Real Estate Market: An Urban Perspective(Editing Note: a companion paper, entitled as “Real Estate Market,” is also included in the book,
World of Regional Science).

1. Definition
According to the Cambridge Dictionary, “market” has different meanings. It may be“the business or trade in a particular product, including financial products.” It may also be“a place or event at which people meet in order to buy and sell things.”(https://dictionary.cambridge.org/dictionary/english/market).

2. History
Real estate can be approached in various ways. Some view it as durable consumption goods,
while urban economics literature emphasizes its spatial dimension. Considering the uniquenessof each location, it becomes evident that real estate properties are inherently heterogeneous.

3. Theory
Economists have long recognized the significance of studying the real estate market from anurban perspective. For example, Kain (1962, p.137) concludes that "households substitutejourney-to-work expenditures for site expenditures." Imagine that the job opportunities areconcentrated in downtown areas. Workers face a choice: they can opt to "live near the jobs,"
saving on commute time and expenses, but likely paying higher rents and residing in denser
neighborhoods. Alternatively, they can choose lower density areas with cheaper land prices andlarger housing units, but this would entail higher commuting costs and time, whether they driveor use public transportation. Hence, workers' residential decisions involve a trade-off between
commute and housing expenses. Similar concepts were subsequently formalized by Mills (1967)
and Muth (1969), leading to the development of a substantial body of research known as "urbanmodels" (Brueckner, 1987).
Residential locational choices often involve additional factors to consider. For example, certain
races may face systematic discrimination, resulting in limited options for residential locations
compared to other races. For simplicity, we assume that the residential location for thediscriminated race is predetermined, and the trade-off lies in the accessibility of job opportunities
for these individuals. This forms the basis of Kain's analysis (1968). Kain assumes that African
Americans experience housing market discrimination, making geographic mobility challenging.
As a result, they must either seek employment within their neighborhoods or allocate asignificant portion of their income to transportation in order to work in more distant areas. Kain
examines micro-data from Chicago and Detroit, finding evidence to support his hypotheses.

Recent research by Shertzer and Walsh (2019) also confirms the existence of segregation
between African Americans and White individuals.
4. Conceptualisation
From an urban perspective, the housing market of a city consists of distinct “submarkets,” suchas the "downtown" and "suburban." Other researchers may further divide the city into a limited
number of segments, such as "East" and "West," and within each segment, there exist numerous
smaller submarkets that vary in their distance from the central business district (CBD), where job
opportunities are concentrated (Hanushek and Yilmaz, 2022).
5. New developments
The study of the urban housing market has witnessed numerous advancements, although only a
few can be highlighted here due to space constraints. Firstly, individuals may choose to purchasehousing units in certain areas for various reasons, such as access to quality public education(Hanushek and Yilmaz, 2022). Secondly, local public goods, like public education, may havesubstitutes available in the market, such as private education, which can be accessed regardlessof residential location. This can lead to changes in locational choices and subsequently impact
housing submarkets (Hanushek et al., 2011). Thirdly, individuals with different income levels
may sort themselves into distinct submarkets. When an upper limit is imposed on the share ofincome allocated to housing expenses, either through housing affordability policies ormacroprudential policies on debt-to-income ratios, spatial sorting becomes distorted, potentiallymagnifying or reducing welfare disparities between higher and lower income groups (Gong andLeung, 2024). Lastly, considering the self-sorting behaviors of households, transportation
vouchers and housing vouchers can have varying implications for different groups of individuals(Yilmaz and Yeşilırmak, 2023).
6. Policy relevanceThe studies of the urban housing market play a crucial role, particularly in understanding andaddressing issues of housing segregation and its impact on inequality among different ethnic
groups, as demonstrated by Kain (1968).
7. Application fields
Models of urban housing markets have been integrated into labor and macroeconomic
frameworks.
8. Prospect
With increasing available granular data, one would explore more issues in urban housingmarkets.

Reference
Brueckner, J. (1987). The structure of urban equilibria: A unified treatment of the Muth-Millsmodel, in E. S. Mills (ed.), Handbook of Regional and Urban Economics, volume 2, chapter 20,821-845.
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