An empirical comparison of
Housing expenditures and user costs for
the four Danish tenures
Jens Lunde
Department of Finance, Copenhagen Business School
Marc Lund Andersen
Knowledge Center for Housing Economics, Realdania
”Private Renting After the Crisis”
ENHR Private Rented Markets Conference
London School of Economics, Lincoln’s Inn Fields
19-20 March 2015
Housing expenditures
– liquidity – payments
• Rental properties: rents
– The rental income must cover the landlords
expenditures + capital return
• Owner-occupation:
– Operation costs + maintenance + administration
[value of own time]
– Property and land taxes
– Debt services (interest exp. + instalments) after tax
Housing expenditures
– liquidity – payments
Problems
– Size of down payment / equity
– Instalments
– The influence from inflation
– Depreciations – value of wear and tear
– The influence from taxation
User costs – intuitively
– private rental dwellings
Expenditures to be covered
through the rent income.
The same items are included in the
rules for the rent regulation, as
a large part are under rent
regulation.
Operation, maintenance
and administration
expenditures
+ Land taxes
+ Rate of depreciation
+ Capital costs before tax
(landlord’s required
return)
– Nominal property price
increase
User costs – intuitively
– private rental and owner-occupation
Private rental dwelling:
Operation, maintenance
and administration
expenditures
+ Land taxes
+ Rate of depreciation
+ Capital costs before tax
(landlord’s required
return)
– Nominal property price
increase
Owner-occupied dwelling:
Operation, maintenance
and administration
expenditures
+ Land taxes
+ Property value tax
+ Rate of depreciation
+ Capital costs after tax
– Nominal property price
increase
User costs – an analytical useful concept
Wish an all-inclusive-concept, which
- express the true housing costs
- express the pure economic burden at housing consumption
- doing the housing choice based on an economic calculation
- render it possible to estimate the balance among the tenures at the
housing market
- render it possible to analyse the distributional effects of the
housing policy
” …. that the best way to evaluate how the tax system,
financial markets and housing markets have combined
to generate incentives to owner-occupation is to
evaluate the user costs of owner-occupied housing.”
(Miles, 1994, p. 56).
User costs Ex ante or Ex post?
Use the user cost formula for owner-occupation:
UCOOt = Et· iE,t·(1 – TE,t) + Ft·iF,t·(1 – TF,t)
+ Kt·(dt + qt + et + a·gTt – pej,t)
• Expected inflation will be paid through the nominal interest rate
(Irving Fisher).
• Unexpected inflation will release a capital gain/ capital loss for the
owner.
• Expected house price increases/decreases are paid through the
purchase price
• Unexpected house price increases/decreases are not paid in advance
and create gains/losses for the owner.
• Ex ante user costs can not be negative realistic seen, i.e. expected high
price increases will be capitalized ”immediately” and release even
stronger house price increase – for a while.
• Ex post user costs for owner-occupied houses have changed strongly
over the last 35 years – and can be rather high as well as even negative.
Normalized required return of property investment
- at a long term risky property investment
• Interest rate at an infinite investment horizon, i.e. inclusive a time
premium:
4.5 % 5.5 %
• + Rate of depreciation
1% 1%
• + Risk premium (illiquidity, risk on the property price, other risk at
ownership)
2% 2%
• minus expected long term price increase
2% -8%
• Required annual operational yield of the property investment:
•
5.5 % 16.5 %
• The interest rate on a mortgage loan is much lower.
• While the interest rate on commercial bank loans is much higher.
• However, the weighted interest rate on the loans must be lower than the
required return of the property investment.
•
•
Never before seen negative short term interest rates
– and never seen interest rates on 30 years FRM below 2½ %.
• Required nominal return: 7.5 % – if increasing property prices.
• More art than science
• Always THE problem: which rate of increase in the property prices can be expected?
• Preliminary results of the calculation of housing
expenditures and user costs for the four Danish
housing tenures.
Assumed values of
the economic variables
Variables
Market value of the property, primo 0
Actual values ”normalized
values”
1
1
Part financed with equity (down payment)
5%
5%
Part financed with bank loans
15%
15%
Part financed with mortgage.
80%
80%
Rate of return for an investment with the same risk.
4.50%
7.50%
Debtor interest rate on the mortgage loan.
2.15%
5.15%
Rate of fee on the mortgage loan
0.90%
0.90%
Number of years at the mortgage loan.
30
30
Debtor interest rate on the bank loan.
7.00%
10.00%
15
15
Rate of inflation (consumer price index).
0.40%
2.00%
Rate of price increase for houses of unchanged quality.
3.30%
2.00%
Number of years at the bank loan.
The used parameters
Parameter
Size
Operational, maintenance and administration
expenditures in year t
2%
Rate of depreciation in year t.
1%
The land’s value as part of the property value.
25%
Land tax rate.
2.63%
Property tax rate in t.
0.60%
The tax rate at the equity return at an alternative
investment with similar risk.
42.00%
The tax rate for negative capital income.
33.6%
The starting capital cost percentage in social
housing
2.80%
Fee on mortgage loans, social housing
0.30%
User costs - using normalized values
Year
Owneroccupation
Private cooperative
housing
Private rental
housing
Social
housing
1
0,0756
0,0909
0,0988
0,0570
5
0,0773
0,0908
0,1020
0,0602
10
0,0793
0,0898
0,1062
0,0645
15
0,0810
0,0872
0,1104
0,0692
20
0,0831
0,0859
0,1145
0,0742
25
0,0850
0,0845
0,1187
0,0785
30
0,0867
0,0817
0,1227
0,0829
User costs - using normalized values
0.13
0.12
0.11
0.10
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0
5
10
Owner-occupation
Private rental housing
15
20
25
Private co-operative housing
Social housing
30
Housing expenditures – using
normalized values
Year
Owneroccupation
Private cooperative
housing
Private rental
housing
Social
housing
1
0,0911
0,1000
0,0988
0,0570
5
0,0935
0,1004
0,1020
0,0602
10
0,0972
0,1007
0,1062
0,0645
15
0,1022
0,1009
0,1104
0,0692
20
0,0861
0,0812
0,1145
0,0742
25
0,0896
0,0809
0,1187
0,0785
30
0,0938
0,0803
0,1227
0,0829
Housing expenditures – using
normalized values
0.13
0.12
0.11
0.10
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0
5
10
Owner-occupation
Private rental housing
15
20
25
Private co-operative housing
Social housing
30
User costs – using actual values from
the start of 2015
År
Owneroccupation
Private cooperative
housing
1
0,0428
0,0485
0,0558
0,0570
5
0,0448
0,0491
0,0597
0,0597
10
0,0476
0,0497
0,0651
0,0635
15
0,0507
0,0501
0,0712
0,0676
20
0,0545
0,0521
0,0780
0,0722
25
0,0588
0,0549
0,0857
0,0771
30
0,0636
0,0580
0,0942
0,0826
Private rental
housing
Social
housing
User costs – using actual values from
the start of 2015
0.13
0.12
0.11
0.10
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0
5
10
Owner-occupation
Private rental housing
15
20
25
Private co-operative housing
Social housing
30
Housing expenditures – using actual
values from the start of 2015
År
Owneroccupation
Private cooperative
housing
1
0,0810
0,0803
0,0558
0,0570
5
0,0842
0,0815
0,0597
0,0597
10
0,0889
0,0832
0,0651
0,0635
15
0,0945
0,0850
0,0712
0,0676
20
0,0829
0,0707
0,0780
0,0722
25
0,0881
0,0731
0,0857
0,0771
30
0,0938
0,0758
0,0942
0,0826
Private rental
housing
Social
housing
Housing expenditures – using actual
values from the start of 2015
0.13
0.12
0.11
0.10
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0
5
10
Owner-occupation
Private rental housing
15
20
25
Private co-operative housing
Social housing
30