how housing associations lose their value: the value gap in the netherlands johan conijn & frans...

How housing associations lose their value: the value gap in the Netherlands

Johan Conijn & Frans Schilder

Amsterdam School of Real Estate/ University of Amsterdam

The value gap

• Value gap: concept used in gentrification theory (Hamnett & Randolph, 1988)

• Value gap is the difference between ‘vacant possession value’ and ‘tenanted investment value’.

• Value gap may trigger gentrification by conversion rental houses into owner occupied houses

Focus of the paper

• Value gap in the Netherlands in the social rented sector

• Decomposition of the gap into 6 components using a market equilibrium as a reference

• Analysing differences between housing associations

• Consequences for housing policy

The gap: result of a dysfunctioning housing market (1)

• Owner-occupied sector

- fabourable tax treatment (deductability of interest payments)

- very low elasticity of supply (land use restrictions)- tax subsidy is capitalized in the value of the

houses (upward push of 15% - 30%)

The gap: result of a dysfunctioning housing market (2)

• Rental sector- rent control for 95% all rental houses (profit and

non-profit)- rent level (far) below market equilibrium level

(entrance to the market is rationed by queueing)- rent control depresses the investment value of the

house- additional to rent control a system of housing

allowances exists

The gap: result of a dysfunctioning housing market (3)

• Housing associations:

- 455 associations, 2,2 million houses- dominant postion on the housing market (1/3 of

total stock; ¾ of rental stock)- solid financial position (average 30% net equity

based on net present value assets and liabilities)- not-for-profit: limitied incentive to sell houses

(average yearly 0.6% of stock)

Used data

• Data provided by the national regulator (Central Fund for Social Housing)• Vacant possession value

- based on tax valuation (Valuation for Property Act), usable approximation of the vacant market value

• Tenanted investment value- net present value of the cash flows based on the own policy of the housing

associations (presuming ongoing rental situation)

- 455 associations, 2,2 million houses- dominant postion on the housing market (1/3 of total stock; ¾ of rental - solid financial position (average 30% net equity based on net present value assets

and liabilities)- limitied incentive to sell houses (average yearly 0.6% of stock)

Value gap per house

Value gap

Vacant possessio

n value

Tenanted investment value

Some figures

Table 1: Vacant possession value, tenanted investment value and the value gap present in association-owned houses, in euros, 2007

N Minimum Maximum Mean Std. Deviation

vacant possession value 2,242,830 61,916 334,479 151,591 27,320

tenanted investment value 2,242,830 427 104,170 33,512 7,355

value gap 2,242,830 11,460 296,734 118,079 27,508

Decompostion of the value gap: the model

• Reference: market equilibrium without interference of the government policy: there is in principle no value gap

• Value of the house is equal to net present value future cash flows (market equilibrium values)

• Market equilibrium rent level based on well known user costs formula

Decompostion of the value gap: six components

• Six components are distinguished

- the favourable tax treatment in the owner-occupied sector- a difference in the remaining lifespan- a difference in rent level- a difference in maintenance costs- a difference in management costs- a difference in residual value at the end of the remaining

lifespan

Differences: equilibrium market versus housing association

Average values taken by housing associations

Market equilibrium values

Remaining lifespan 23 years 23 + 25 years

Rent level 2007 € 4,383 endogenous, determined within the model

Maintenance costs 2007

€ 1.125 € 875

Management costs 2007

€ 1,089 € 730

Residual value (2007 prices)

€ 5,000 15% of the market equilibrium value of the

house

Value of macro-economic parameters

• Inflation (CPI) 2%• Price increase construction maintenance and

management costs (plus 1%) 3%• Yearly rent increase 2.25%

(3% minus 0.75% annual obsolescence)• Desired total rate of return 6%

Breakdown of the value gap, billion euros, 2007

Vacant possession value 340.0

Effect of tax policy - 68.0

Market equilibrium value 272.0

Effect of shorter lifespan - 25.2

Effect of lower rent level* - 127.8

Effect of higher maintenance costs* - 14.9

Effect of higher management costs* - 21.3

Effect of lower residual value* - 7.6

Tenanted investment value 75.2

Differences in the relative rent gap per house

Other results of the model

• Depreciation 1.3%

(varies between 0.91% and 1.77%)

• Market equilibrium rent level € 6,836– Actual rent level € 4,383– Implicit subsidy € 2,453

• Total implicit subsidy (yearly) € 5.5 billion

Loss of direct return

N Minimum Maximum Average Std. Deviation Market direct rate of return 2,242,830 3.91 4.77 4.32 0.09 Actual direct rate of return 2,242,830 0.08 5.23 1.84 0.44 Loss in direct return 2,242,830 - 1.11 4.65 2.48 0.43

Loss of direct return

Results as a management tool

• Market equilibrium values as a reference point for benchmarking:- performance measures in relation to the market- performance measures in relation to the average

of the sector

• Identifying opportunities to generate cash flow instead of selling

Policy implications

• Are housing associations a cost efficient instrument of housing policy?

• Is a below markt rent level an effective instrument to secure affordability?

• A change of the general implicit subsidy to a more specific extended system of housing allowances is required