Friday, April 27, 2012

Renters vs. Owners - Conflicts of Interest

Owner-occupiers take actions intended to maximize property values, either as part of an effort to maintain and increase resale value, or as a consequence of improving the amenity value of the house for their own use. In contrast, landlords seek to maximize return on investment, which entails maximizing rents while minimizing expenses. As neither landlords nor tenants are able to enjoy the full benefit of making improvements on a house, both groups are inclined to avoid maximizing the amenity value of the house. This can lead to long term disinvestment in the house, causing it to become run-down.

Wednesday, April 25, 2012

Neighborhoods & Amenity

In abstract, a house can be understood as a bundle of characteristics that determine its value. The value of a house is not determined solely by the characteristics of the house, but also by its location. These characteristics represent sources of amenity. Two broad classes of amenity exist: Amenity of structure and amenity of location. Structural amenities are typically defined by number of bedrooms, number of bathrooms, square footage, and other characteristics of the house. Amenities of location are typically characterized in terms of proximity to sources of amenity (shopping, recreation) and dis-amenity (air pollution, crime, noise). 

The importance of location is widely recognized in real-estate. All property occupies a unique location in space, and thus all real estate is unique and non-replicable. Nearby locations sharing similar characteristics often act as complements.

But there exists an additional package of amenities of location not contingent on proximity, typically characterized in terms of ‘neighborhood’. The concept is poorly defined, formally referring to a geographic area, but also referring to a less well articulated set of aspects associated with that that. Neighborhood membership is typically defined by proximity, but the boundaries of neighborhoods are rarely well defined, and may change over time.  

Neighborhoods are important because geographic proximity implies more frequent interaction. Whether interaction represents an opportunity or threat depends on the compatibility of residents. Does not imply social conformity, but rather social compatible—norms about the use of space, social presentation, privacy, and behavior do not conflict. Desirable neighborhoods are characterized by compatible socio-demographic groups. ‘Areas in transition’ represent shifts in the socio-demographic characteristics of a neighborhood, as different groups move and in and out.

Houses in a similar neighborhood already share amenities of proximity and amenities of neighborhood, so that neighborhoods with houses with similar amenities of structure also show highly uniform prices. This affects housing affordability, and results in a strong association in socio-economic status with neighborhood.