Financial Arrangements, Housing Prices And Home Ownership

Housing policies in many countries emphasise that households should have the possibility to own their own homes. In order to achieve this goal, it is important that the financial threshold for purchasing a dwelling is kept at a low level. The Scandinavian housing cooperatives provide an interesting devise in this respect. Those living in housing cooperatives can be regarded as the legal owners of the housing unit they occupy, similar to what is the case for those living in non-cooperative dwellings. Moreover, prices of both types of dwellings are market determined. The two types of homeownership are, however, different in two important respects. First, they differ in how the housing units are financed. Second, they differ in how decisions affecting all units in a housing cooperative are taken. In the present paper we provide an analysis of how financial structure and organizational form affect the prices of housing units. We are not aware of previous analysis of how organizational forms like the Scandinavian housing cooperatives affect prices. Our analysis of the impact of financial structure is related to the literature on creative financing, but we contribute by using a very different type of data. For dwellings in housing cooperatives, the price paid by the buyer consists of two elements: First, there is an equity price, determined through a normal competitive bidding process. Second, each dwelling in a housing cooperative carries a share of the mutual debt held by the cooperative. This share of the cooperativeís debt is paid down by the owner through monthly instalments. The amount of money an entrant to a housing cooperative has to raise himself, either by drawing on his saving account, or by obtaining a bank loan, corresponds to the equity price. If the mutual debt is small, the equity price will be high. A large share of the households may then be constrained in their access to credit, and may thus be barred from entering the housing cooperative. If the mutual debt is large, however, the entrance barrier for first-time home-buyers will be low. This is inter alia due to the fact that the responsibility for the mutual debt is shared between all the members of a housing cooperative. Let us define the equity ratio as the equity price divided by the sum of the equity price and the share of the mutual debt resting on the dwelling. In the data used in the present paper, the equity ratio for cooperative housing units may vary between 0.15 and 1.00. In addition, the sample includes non-cooperative (freeholder) dwellings, where the equity ratio is 1.0. Hence, the data provide good opportunities for identifying how financial structure affects the market price of dwellings. Moreover, we are able to identify the impact of organizational form. We identify these effects through the estimation of hedonic price equations. Housing cooperatives usually obtain loans on more favourable conditions than single households. This reflects that the risk premium included in the interest rate on the debt of housing cooperatives is smaller than for a freeholder. Presumably, this advantage is capitalized in the market price, resulting in a higher total price (equity price plus share of mutual debt carried by the housing unit) for dwellings in housing cooperatives than for a corresponding freeholderís dwelling. Moreover, this effect is expected to be stronger the smaller is the equity ratio. The results indicated above have important policy implications. First, they suggest that financial arrangements can be used to increase the rate of homeownership, even in the absence of government subsidies. In particular, the results show how entry barriers for first-time home-buyers can be lowered. Equally important, these benefits come at the cost of a higher market price. We estimate the extent of this price increase. To our knowledge, this type of analysis has not previously been carried out. The price effect discussed above rests on the estimated hedonic price equations. In addition, a model explaining the rationale for the price effects will be developed, partly building on the existing theories on borrowing constraints, credit rationing and homeownership financing. To explain the effects of the financing system of the Norwegian housing cooperatives, we will however have to develop new theory elements of how the housing market is affected by this financing system. To conclude, our main hypothesis is that the financing systems of the Norwegian housing cooperatives affect market prices, resulting in higher prices for cooperative dwellings with low equity ratio. Nevertheless, through reducing the extent of credit rationing, this may lead to a higher ratio of homeownership.