Endogenous spatial structure and delineation of submarkets: A new framework with application to housing markets

Arnab Bhattacharjee, Eduardo Castro, Taps Maiti and João Marques
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Eduardo Castro: University of Aveiro
Taps Maiti: Michigan State University
João Marques: University of Aveiro

No 1403, SEEC Discussion Papers from Spatial Economics and Econometrics Centre, Heriot Watt University

Abstract: Definition of housing submarkets is important at both conceptual and empirical levels. In the housing studies literature, submarkets have been defined according to three different criteria: i) similarity in hedonic housing characters, ii) similarity in hedonic prices; iii) substitutability of housing units. We argue that the simultaneous fulfilment of criteria i) and ii) is a sufficient condition for criteria iii) to be fulfilled. Criterion i) is directly observable, while criterion ii) can be checked by a model able to detect and analyse spatial heterogeneity in the shadow prices. Here, we propose a new framework, based on a synthesis of spatial econometrics, functional data analysis (FDA) and geographically weighted regression (GWR). The framework is applied to a hedonic regression model where the dependent variable is logarithm of house prices per square meter and housing features are regressors. Thus, we delineate submarkets by clustering (jointly) on the surfaces of the estimated functional partial effects and housing features. The above model addresses two main limitations of previous approaches. First, endogeneity in spatial structure can be incorporated in the model. Second, the framework does not require delineation of housing submarkets a priori. Application to the housing market of the Aveiro-Ílhavo urban conglomeration in Portugal implies submarkets that emphasize the historical and endogenous evolution of the urban spatial structure.

Keywords: Spatial heterogeneity; Submarkets; Spatial lag model; Geographically weighted regression; Functional data analysis (search for similar items in EconPapers)
JEL-codes: C21 C51 R31 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-ecm, nep-geo and nep-ure
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