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