Thursday, June 24, 2010

Gas prices and the Demand for Housing---Complements are COOL!!

     Complements come in all shapes and sizes. Here is one I had not thought of before:  The relationship between gasoline prices and the demand for housing in areas away from a central city.  Complements are goods that are separate and distinct but are often used together, and when the price of one of the goods increases or decreases, it likely decreases or increases the demand for the complementary good.  There is an inverse relationship between price change in one and the demand for the other.  In this case, the researchers find evidence that higher gasoline prices negatively impact the demand for housing the further away one gets from metropolitan areas where a preponderance of major employers are concentrated.  There are a whole host of reasons people choose to move from urban areas to suburban areas (crime, schools, "quality of life", etc) but seldom is the price of gasoline mentioned as a primary motivator or de-motivator.  Do these other reasons suggest some people may not be very responsive to increases in the price of gasoline, hence their demand for suburban housing is not affected? The research seems to suggest it is people "at the margin" (people on the fringes of deciding to migrate to the suburbs) who are more sensitive to the economic, as opposed to social issue of gas prices, and it plays a larger role than the quality of life issues mentioned above, in the decision to move or not...Hmmmm...COMPLEMENTS ARE COOL!!

The Effect of Gasoline Prices on Household Location---(scroll down for PDF link)
"Gasoline prices influence where households decide to locate by changing the cost of commuting.  Consequently, the substantial increase in gas prices since 2003 may have reduced the demand for housing in areas far from employment centers, leading to a decrease in the price and/or quantity  of housing in those locations relative to locations closer to jobs. Using annual panel data on ZIP codes and municipalities in a large number of metropolitan areas of the United States from 1981 to 2008, we find that a 10 percent increase in gas prices leads to a 10 percent decrease in construction after 4 years in locations with a long average commute relative to locations closer to jobs, but to no significant change in house prices. Thus, the supply response may prevent the change in housing demand from capitalizing in house prices. Because housing is durable, the resulting change in construction has a long-lived impact on the spatial distribution of housing units."
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