Housing tenure Flashcards
Define housing tenure
Housing tenure refers to financial/contractual agreements in which an individual/multiple individuals have the right to live in a property.
-It defines the t and cβs of occupancy of a property.
-Simplified is the Decision between renting and buying
Why is housing important
-Provides shelter and an evinronment to raise a family.
-Most important asset bought by households.
-Major component of asset holding in the UK/most countries.
-Seen as a measure of success and achievemnt
Assumptions of the housing tenure model
-ind can buy/own or rent
-Model assumes measures of housing consumption can be UNIdimestional meaning relating to a single aspect/number.
-Assumes demand function given by π = πΌπ^π½π¦^π
where
p= price per unit of housing, y is income, π½ πππ π are price (negative) and income (positive) elasticities.
-Researchers aim to estimate magintudes of these elasticite.
-Housing expenditue E = pq therefore no requirement of physical measure of housing consumption (q).
-Housing demand is price inelastic,
For a renter:
pq is total rent
-For a home owner
pq is value of house and p is purchase price per unit of housing
-Hosuing expensidture/consumption makes up a smaller and smaller share of income as incoem rises. (decreasing in income)
Housing demand in the traditional housing tenure model (for renter and owner)
-π = πΌπ^π½π¦^π
-pq = ap^π½+1y^π
Housing expenditure in traditional household tenure model
-Expenditure either represents rent or value for a home owner
E = pq
πΈ = πΌπ^π½+1π¦^π
which can be written as:
ln πΈ = ln(a) + (π½ + 1)ln(π) + πln(π¦)
Costs of housing for individuals
-When individual rents price per unit is rental price pr
-When an individual /buys owns a home cost per unit includes mortgage payments, property taxes, depreciation, maintenance, cap gains etc.
Formula for anual cost faced by a homeowner + cost including income taxes
-V(i + h + d - g)
-V refers to value of house assuming 100% mortgage (no deposit)
-iv anual interest cost
-dv depreciation
-hv anual property tax
-gv is capital gains
-V is given by p (per unit) * q (units of properties/sqft). Therefore cost for owner can be written with pq instead of V, dividing by q for per unit cost gives:
(1 + h + d - g)Punit = cost per unit
-adjusted for income taxes (t) cost per unit owning:
((1 β t) (π + β) + π β π) * Pπ’πππ‘
Formula for profit per unit of housing owned
(1 - ΞΌ)(pr - (i+h+d-g)Punit)
Formula for rental price/cost pr for a renter
pr = (i + h + d - g)* Punit
-Found by assuming compeition leads market profits to be 0.
-Similar to price of owning without the income tax term.
Tenure choice for individuals, whether to rent or own
Assuming tax deductions and that the market is perfectly competitive owning is always preffered to renting as cost of owning < cost of renting.
profit per unit and new renting cost including landlords depreciation
-In the US landlords allowed to deducted accelerated depriciation, assuming buildings wear out after 27.5 years of use.
-Depreciation for owning therefore d + e
-Profit per unit = (1 - ΞΌ)(pr - (i+h+d-g)Punit + ΞΌePunit
-New rental cost: (i + h + d - g)* Punit - ΞΌePunit / 1- ΞΌ
Tenure choice graph + whwn its cheaper to rent/own
-FLASHCARD
-downward sloping as user costs of owning is decreasing in the tax rate (greater deductbiles.)
-Cheaper to rent for low tax rate individuals, cheap to own for high rent individuals.
-Therefore low income households (low tax) will be renters high income will be owners (higher tax)
-when both cost curves interesct this is the threshcold which devides owners and renters.
Effect of a change in landlord/owning tax
-Eg) decrease in lanlord income tax decreases cost of owning therefore increases share of homeowners and less renters
-Shifts horizontal curve up or down (up for t decrease, down for t increase)
Limitations of housing tenure model/otherfactors effecting decision to own/rent
-Doesnt include deposits/donwpayments, play a big role in reality in housing markets, also represents a barrier to entry/higher cost for owning. Potentially more renting.
-Doesnt take into account income uncertainty. individuals with higher income uncertainty β> less likely to own and have access to mortgage market.
-Robst et al. (1999) β employs several measures of uncertainty β findings suggest greater uncertainty
is associated with a lower likelihood of home ownership
-Transaction costs with buying and selling, agency fees.
-Mobility, whether moving alot with work etc.
-Ownership pride, individuals βproudβ of owning may effect decision to own/rent.
-Risk, owning may be risky if individuals income is correlated with houseprices.
Effect of adding deposits/downpayments to model
-Individuals with income tax below the threshold (when curves intersect) will still be renters.
-Individuals above the tax threshold (interesct) will either rent or own depending on their patience. If patient will aqquire deposit and own, vise versa.
