Love thy neighbours or do ethnic neighbourhood qualities matter? Ethnic price differentials in a multi-ethnic housing market

New Zealand is a multi-ethnic society that embraces multiculturism. Many studies have examined how the concentration of ethnic minorities affects residential property values within small neighbourhoods. However, very few studies have recognised that characteristics of neighbourhoods other than ethnic concentration may cause such price differentials. We use the repeat-sales model, based on more than 66,000 housing transactions in the most ethnically diverse city in New Zealand, to control the unobserved biases and identify the effects of changes in the concentration of ethnic minorities on house prices over time. We argue that the commonly perceived ethnic housing price discount may not be a consequence of taste-based discrimination but statistical discrimination of prospective homebuyers on neighbourhood qualities. After controlling neighbourhood characteristics, which can be unobserved and are assumed to be unchanged over the course of the four censuses, the effect of the ethnic price differential, either increase or decrease, becomes insignificant on house prices. The statistical discrimination hypothesis is further confirmed using the Special Housing Area (SHA) as an exogenous amenity shock in a spatial-temporal differencing model. Using the conventional hedonic model without considering the neighbourhood qualities can be misleading.