# Chapter 1 Introduction

Figure 1.1: Welcome of readers (English)

Figure 1.2: Welcome of readers (Russian)

This textbook is intended to serve as an introduction into the housing economics for the higher school students and all other persons interested in this topic. It covers six major topics, which are briefly described below.

Chapter 2 provides an introduction to urban economics. It shows the mportance and main principles of the urban economics. It discusses the emergence and development of cities and describes the urbanization process. Using the theory of central places of Christaller and L"osch it explains the large differences existing between city sizes. In addition, it takes advantage of the Alonso-Mills-Muth model of land use in the city in order to explain the internal structure of cities. Finally, it presents the evidence of the population and employment density gradient.

In chapter 3, the main general and specific features of the housing market are presented: heterogeneity, immobility, and expensiveness. Moreover, a stock and flow model of the housing market is introduced that illustrates the interplay of the housing supply and demand as well as the short-run rigidity of supply. In addition, it discusses the housing vacancy and affordability. The narrative is supported by a rich evidence about the housing market in Russia and abroad.

Chapter 4 focuses on the valuation of the real estate. Alternative approaches to valuing the heterogeneous and immobile good housing’’ are presented. In more detail the techniques stemming from the sales comparison method are considered, such as stratified valuation method, repeat-sales methods of Bailey and Case-Schiller, and hedonic regression. These isolate the impact of structural and locational factors on the housing price from that of the inflationary price increases. Finally, the models capturing the spatial dependence between housing prices are introduced.

In chapter 5, the issue of speculative housing price bubbles is considered. It provides the definition of speculative bubbles as large and long lasting decoupling between the actual and fundamental prices. The chapter shows the importance of the early warning systems, which are used to predict the build-up of speculative price bubbles. Alternative methods of identifying speculative housing price bubbles, such as ad hoc, fundamental value regressions, and explosive root tests are presented. In addition, various methods of predicting speculative housing price bubbles —signalling approach and discrete-choice models— are considered. Finally, non-linear models for identification and prediction of speculative bubbles —threshold autoregression, smooth transition autoregression, and Markov-switching regression— are discussed.

Chapter 6 concentrates on the housing tenure choice. It starts from defining the notion of tenure and describing various tenure types. Then, the focus is made on the dichotomy between the owner-occupied and tenant-occupied housing. In particular, the importance of the homeownership as shown and its advantages and disadvantages from the standpoint of individuals and society are compared. The chapter considers theoretical models explaining the choice between the owner-occupied and rental housing, which are based on the notion of the user cost. The chapter concludes with the analysis of the spatio-temporal variation of the homeownership rates.

Chapter 7 is devoted to the governmental intervention in the housing market. It thoroughly discusses objectives and tools of such intervention. In this chapter, the indices measuring the intensity of restrictive governmental housing market regulations are presented. Finally, the indices are used to trace the evolution of the rental regulation intensity worldwide during the last century.

In the end of each chapter, a set of control questions and discussion topics is presented. In addition, a list of key terms is provided.

The material presented here has been used in 2018–2020, when the author has had a nice opportunity to teach the course of housing economics by the undergraduate students at the NRU HSE in St. Petersburg. The textbook contains lots of empirical evidence to illustrate theoretical concepts. Particular weight is placed on discussing the Russian experience.

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