Ethnic diversity and neighborhood house prices

Abstract

In recent decades, the large influx of immigrants to the U.S. and other developed countries has made cities in these countries more ethnically diverse. In this paper, I aim to understand whether and how ethnic diversity affects communities in these cities. A general equilibrium model is built in which people of many ethnic groups interact in the housing market through both price signals and non-market mechanisms. An endogenous correlation between neighborhood house price and the Herfindahl index of ethnic concentration arises because of social interactions. After addressing the endogeneity issue, I find that neighborhoods with more homogeneous minority populations command higher prices using a dataset of housing transactions and neighborhood socio-economic characteristics in Vancouver, Canada. This and other findings support the notion that non-market social interactions influence people's preference and behavior.