Essays in real estate economics and household finance

This thesis consists of three essays on real estate and household finance. The first chapter examines heterogeneity in housing markets both within and across the largest cities in the UK. I combine several novel datasets of UK property markets and document three key novel facts: (i) housing quality is segmented between the rental and owner-occupied sectors, with rentals generally offering lower quality, (ii) cities with more quality segmentation tend to have higher rent-to-price ratios, and (iii) in more segmented cities landlords have fewer assets and face lower capital gains. These facts suggest that heterogeneity in landlord supply constraints may play an important role in shaping local housing markets. In the second chapter, I develop and estimate a two-sided assignment model of the housing market to quantify the effect of landlord supply constraints. The model features households’ optimal choice of housing quality and tenure (i.e., the choice to rent or own) in the presence of borrowing constraints, landlords’ profit-maximizing choice of quality to rent out, and endogenous quality segmentation and rent-to-price ratios determined in equilibrium. I conduct counterfactual experiments to show that differences in landlord supply constraints explain much of the variation in quality segmentation and rent-to-price ratios observed within and across cities. The third chapter, based on work co-authored with Benjamin Guin and Liam Clarke, explores the role of lending in transmitting shocks to residential real estate. We examine an adverse and salient shock to a segment of the property market (high rise flats) in England and Wales. Using an event-study design that compares flats and non-flats in the same local area, we show that mortgage originations for affected properties declined sharply by around 30% in London following the change. This contraction was concentrated among first-time buyers who experienced an almost 50% drop. At the same time, the share of cash purchases rose by five percentage points, implying a re-allocation of ownership from credit-constrained households to wealthier, mortgage-independent buyers. To distinguish between reduced credit supply and falling borrower demand, we examine the evolution of rents and prices. While prices fell by about 2.5% relative to unaffected units, rents rose by 2%, suggesting that demand to reside in these homes remained stable even as their collateral value declined.