How housing associations lose their value the value
- Slides: 21
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)
Value gap per house Value gap Vacant possessio n value Tenanted investment value
Some figures
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
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
Differences in the relative rent gap per house
Other results of the model • Depreciation (varies between 0. 91% and 1. 77%) • Market equilibrium rent level – Actual rent level – Implicit subsidy • Total implicit subsidy (yearly) 1. 3% € 6, 836 € 4, 383 € 2, 453 € 5. 5 billion
Loss of direct return
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
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- Lose win attitude
- Win win approach
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