An Hierarchical Approach to the Segmentation of Residential Demand: Theory and Application

Abstract

Despite its importance for housing-market forecasts, residential demand segmentation has received only little systematic scrutiny. In this paper a hierarchical approach is proposed whereby households are segmented by three levels determined by the likelihood of household shifting among strata as defined within the level. First, households are differentiated according to societal constraints (the most difficult to overcome). Second, groups facing similar constraints are stratified by the basic life-style choices made by households. Last, households are stratified according to their situation, which includes their stage in the life cycle and income (the most likely to change over time). An empirical comparison of a hierarchical segmentation which includes life-style elements (the least understood level of the hierarchy) with cross-sectional sociodemographic segmentation shows the hierarchical approach to perform better on several criteria.