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The value gap

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)

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The value gap

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  1. How housing associations lose their value: the value gap in the NetherlandsJohan Conijn & Frans Schilder Amsterdam School of Real Estate/ University of Amsterdam

  2. 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

  3. 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

  4. 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%)

  5. 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

  6. 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)

  7. 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)

  8. Value gap per house Value gap Vacant possession value Tenanted investment value

  9. Some figures

  10. 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

  11. 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

  12. 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%

  13. Breakdown of the value gap, billion euros, 2007

  14. Differences in the relative rent gap per house

  15. 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

  16. Loss of direct return

  17. Loss of direct return

  18. 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

  19. 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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