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Efficiency in housing markets: Which home buyers know how to discount?

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  • Hjalmarsson, Erik
  • Hjalmarsson, Randi

Abstract

We test for efficiency in the Swedish co-op market by examining the negative relationship between the sales price and the present value of future monthly payments or 'rents'. If the co-op housing market is efficient, the present value of co-op rental payments due to underlying debt obligations of the cooperative should be fully reflected in the sales price. However, a one hundred kronor increase in the present value of future rents only leads to an approximately 75 kronor reduction in the sales price. These inefficiencies are larger at the lower end of the housing market and in poorer, less educated regions and appear to reflect both liquidity constraints and the existence of more 'sophisticated' buyers in higher educated areas. Overall, our findings suggest that there is some systematic failure to properly discount the future stream of rent payments relative to the up front sales price.

Suggested Citation

  • Hjalmarsson, Erik & Hjalmarsson, Randi, 2009. "Efficiency in housing markets: Which home buyers know how to discount?," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2150-2163, November.
  • Handle: RePEc:eee:jbfina:v:33:y:2009:i:11:p:2150-2163
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Henry Muyingo, 2015. "Organizational Challenges in the Adoption of Building Applied Photovoltaics in the Swedish Tenant-Owner Housing Sector," Sustainability, MDPI, Open Access Journal, vol. 7(4), pages 1-28, March.
    2. Johan Almenberg & Artashes Karapetyan, 2011. "The Hidden Costs of Hidden Debt," Working Papers 1206, Departament Empresa, Universitat Autònoma de Barcelona, revised Oct 2011.
    3. Kjellander, Josef & Nilsson, Viktor & van Vuuren, Aico, 2018. "The impact of the announcement of temporary building sites for refugees on house prices in Gothenburg," Working Papers in Economics 720, University of Gothenburg, Department of Economics.
    4. Johan Almenberg & Artashes Karapetyan, 2012. "The hidden costs of hidden debt," Working Paper 2011/22, Norges Bank.
    5. Karl Robertsen & Theis Theisen, 2011. "The Impact of Financial Arrangements and Institutional Form on Housing Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 42(3), pages 371-392, April.
    6. Goswami, Gautam & Tan, Sinan, 2012. "Pricing the US residential asset through the rent flow: A cross-sectional study," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2742-2756.
    7. Gautier, Pieter A. & van Vuuren, Aico, 2017. "The effect of land lease on house prices," Working Papers in Economics 686, University of Gothenburg, Department of Economics.

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