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The Neighborhood Effect of Real Estate Maintenance

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  • Andrey Pavlov

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  • George Blazenko
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    Abstract

    We investigate the economics of real estate investment when maintenance of a property enhances neighborhood value. Because a property owner does not recognize this positive externality for his/her neighbor, he/she under-maintains. Smaller properties benefit most from this externality. We show that subsidizing the maintenance expenses of properties can induce socially optimal maintenance. Without disturbing social optimality, the maintenance subsidy can be financed with either a flat tax or a tax that is proportional to the land value or the cost of the improvement. The flat tax is less costly. Commonly used subsidies in the real estate industry based on loan guarantees do not promote socially optimal maintenance. Copyright Springer Science + Business Media, Inc. 2005

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    File URL: http://hdl.handle.net/10.1007/s11146-005-7011-9
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    Bibliographic Info

    Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

    Volume (Year): 30 (2005)
    Issue (Month): 4 (June)
    Pages: 327-340

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    Handle: RePEc:kap:jrefec:v:30:y:2005:i:4:p:327-340

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    Web page: http://www.springerlink.com/link.asp?id=102945

    Related research

    Keywords: Maintenance; Real Estate;

    References

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    1. Joseph T. Williams, 1997. "Redevelopment of Real Assets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(3), pages 387-407.
    2. Becker, Gary S, 1974. "A Theory of Social Interactions," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1063-93, Nov.-Dec..
    3. James F. Epperson & James B. Kau & Donald C. Keenan & Walter J. Muller, 1985. "Pricing Default Risk in Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 261-272.
    4. Danny Ben-Shahar, 2004. "Productive Signaling Equilibria and Over-Maintenance: An Application to Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 28(2_3), pages 255-271, 03.
    5. Harding, John P. & Miceli, Thomas J. & Sirmans, C. F., 2000. "Deficiency Judgments and Borrower Maintenance: Theory and Evidence," Journal of Housing Economics, Elsevier, vol. 9(4), pages 267-285, December.
    6. Sweeney, James L., 1974. "Housing unit maintenance and the mode of tenure," Journal of Economic Theory, Elsevier, vol. 8(2), pages 111-138, June.
    7. Eduardo S. Schwartz & Walter N. Torous, 1993. "Mortgage Prepayment and Default Decisions: A Poisson Regression Approach," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(4), pages 431-449.
    8. Schwartz, Eduardo S & Torous, Walter N, 1989. " Prepayment and the Valuation of Mortgage-Backed Securities," Journal of Finance, American Finance Association, vol. 44(2), pages 375-92, June.
    9. Vorst, Ton, 1986. "The relation between the rent and selling price of a building under optimal maintenance with uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 10(1-2), pages 315-320, June.
    10. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    11. Kau, James B. & Keenan, Donald C. & Muller, Walter III & Epperson, James F., 1987. "The valuation and securitization of commercial and multifamily mortgages," Journal of Banking & Finance, Elsevier, vol. 11(3), pages 525-546, September.
    12. Capone, Charles A, Jr, 2001. "Introduction to the Special Issue on Mortgage Modeling," The Journal of Real Estate Finance and Economics, Springer, vol. 23(2), pages 131-37, September.
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