Housing Demand and Expenditures: How Rising Rent Levels affect Behavior and Costs-of-Living over Space and Time

Since 1970, the share of income spent on housing grew along with incomes and the relative price of housing. This rising share is consistent with housing being a necessity when demand is sufficiently price inelastic. We estimate housing demand parameters using compensated and uncompensated frameworks over space and time, testing restrictions imposed by demand theory and household mobility. Estimates are largely consistent, suggesting that housing demand is slightly price and income inelastic, and obeying the restrictions of demand theory. We construct a non-homothetic constant-elasticity-of-substitution cost-of-living index that reflects housing’s greater importance when housing prices are high and incomes are low.