Efficiency in the market for cooperative dwellings

1. Efficiency in the market for cooperative dwellings Silje Eretveit, Karl Robertsen and Theis Theisen Department of Economics and Business Administration University of Agder Norway

2. Introduction • Efficiency in housing markets important • Efficiency over time: Case and Shiller (1989) • Efficiency with respect to financial arrangements: • Goodman and Goodman (2007) • Kelley (1998) • Schill et. al (2007) • Hjalmarsson and Hjalmarsson (2009) • Robertsen and Theisen (2011) • The present paper builds on RT and HH

3. Norwegian housing cooperatives • 15 % of dwellings in the country are cooperative • Housing cooperatives non-profit institutions. Special law • To obtain a co-op one has to buy a share in the cooperative • A share in the cooperative gives the right to use a specific dwelling • The shareholder is free to sell his unit on ordinary market conditions • Housing cooperatives are partly financed by mutual debt • The mutual debt is paid down through monthly rent • The interest rate on mutual debt is in Norway lower than on private • debt • All shareholders are formally responsible for the full mutual debt

4. The price of a co-op • The price of a dwelling in a housing cooperative consists of two elements: • An equity price determined through a normal competitive bidding • process • The mutual debt: Each dwelling carries a share of the debt held • by the cooperative. The living space of the dwelling determines the • share of mutual debt affiliated with the dwelling

5. We consider two identical dwellings • Dwelling Acarries a mutual debt • Mutual debtispaid down throughrent. • At time 0, thedwellingisboughtattheprice • Dwelling Bcarriesno mutual debt • At time 0, thedwellingisboughtattheprice • The full purchasing price has to be financed privately • What is therelationshipbetween , and ? • How do equity-pricesofthetwodwellingschange over time (Assume zero inflation: Price ofdwelling B constant

6. The financial effects for holders of the two dwellings: • Dwelling A • - Lowerinterestpaimentsthandwelling B • - „Overprice“ whenthedwellingisbought • - Capital losswhenthedwellingissold • Dwelling B • - Sinceweabstract form inflation, thepricethatthe • dwellingcanbesold for isconstantover time

7. P Time T 0

8. The relationship between equity prices at time 0 Înterest discount effect The model can be estimated if mutual debt is known (Robertsen and Theisen (2011))

9. The case when mutual debt is not observed (Hjalmarsson and Hjalmarsson (2009) Rent-function: gives: Substitution into equity-relationship, with, :

10. Asumptions (of Hjalmarson and Hjalmarson): Yield the HH-equation; Easily estimated IF a is known

11. We estimate the two regression functions:

12. Data: All co-op transactions 2009-2010 in Kristiansand municipality

13. Correlation matrix

14. (t-values in parentheses)

15. Conclusions: • Empirical support for efficientprices in the Robertsen-Theisen model • The efficiencyhypothesis is rejectedwhenthe • Hjalmarsson-Hjalmarssonmodel is used withtheir • original assumptions. • Problem: The payback-rate for mutual debt must in the HH-model be pegged prior to estimation. • The resultsarevery sensitive to the magnitude • chosen for this parameter. Alsootherassumptions • in the HH-modelareproblematic.