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

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 increase2.25% (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 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

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