Housing Costs.pdf

Researchers estimate a selection model of property allocation to owner-occupied and rental sectors, finding that structural characteristics and unobserved quality are important for selection, while location is not. Accounting for selection is crucial for estimating rent-to-price ratios and explaining correlations between these ratios and homeownership rates, consistent with hypotheses of contracting frictions in the rental market related to housing maintenance. Key findings include:
1. Physical characteristics like dwelling type and size determine the probability of being owner-occupied, with high-value properties more likely to be owner-occupied but having higher rent-to-price ratios.
2. Location is relatively unimportant for owner-occupancy after controlling for physical characteristics, but rent-to-price ratios vary significantly with location.
3. Modeling unobserved quality is essential, as selection depends on both observed and unobserved characteristics, and rentals have lower unobserved quality, implying biased imputed rents and rent-to-price measures without controlling for selection.