Dissimilarity effects on house prices: What is the value of similar neighbours?

Residential choice does not only depend on properties of the dwelling, neighborhood amenities and affordability, but is also affected by the population composition within a neighbourhood. All these attributes are capitalised in the house price. Empirically, it is not easy to disentangle the effect of the neighbourhood on house prices from the effects of the dwelling attributes. We implement an agentbased model of an urban housing market that allows us to analyse the interaction between residential choice, population composition in a neighbourhood and house prices. Agents differ in terms of education, income and group affiliation (majority vs. minority). The results show that the "wrong" neighbourhood can lead to an average house price depreciation of up to 13,500 monetary units or 7.1 percent. Whereas rich agents can afford to move to preferred places, roughly 13.01% of poor minorities and 8.02% of poor majority agents are locked in their current neighbourhood. By introducing a policy that provides agents more access to credit, we find that all population groups denote higher satisfaction levels. Poor agents show the largest improvements. The general satisfaction level across all population groups increases. However, the extra credit accessibility also drives up house prices and leads to higher wealth inequality within the city. If agents have a preference for status rather than for similarity, the effect of the overall inequality is smaller, since agents become more satisfied living in areas with less similar agents.