Melting Pot or Salad Bowl: Cultural Distance and Housing Investments

Abstract

This paper investigates whether individuals’ cultural background affects their housing investment decisions, drawing inferences from property location choices and transaction prices in Australia. We propose a novel measure of cultural distance for each homebuyer-neighborhood pair, adopting the six-dimension cultural framework in Hofstede (2001). Our measure captures inter-ethnicity similarity and thus measures the cultural similarity of each buyer and neighborhood pair at a more granular level. Utilizing housing transaction data of a culturally diverse city Sydney Australia, we find that buyers are more likely to buy properties in neighborhoods with a shorter cultural distance to their culture of origin and are willing to pay a premium for properties in those locations, consistent with buyers’ preference for cultural proximity. Further, we show that cultural proximity preference is stronger for ethnicities from recent migration waves, particularly Asia. Our findings are generalizable to other regions with ethnic aggregations and offer new insights into the growing literature on culture and household finance as well as the urban economics literature.

Keywords: cultural distance, housing investment, housing price, information friction, home bias

JEL Classification: R00, O18, P22, R21