Peter Englund

Hedging Housing Risk

An unusually rich source of data on housing prices in Stockholm is used to analyze the investment implications of housing choices. This empirical analysis derives market-wide price and return series for housing investment during a 13-year period, and it also provides estimates of the individual-specific, idiosyncratic, variation in housing returns. Because the idiosyncratic component follows an autocorrelated process, the analysis of portfolio choice is dependent upon the holding period. We analyze the composition of household investment portfolios containing housing, common stocks, stocks in real estate holding companies, bonds, and t-bills. For short holding periods, the efficient portfolio contains essentially no housing. For longer periods, low-risk portfolios contain 15 to 50 percent housing. These results suggest that there are large potential gains from policies or institutions that would permit households to hedge their lumpy investments in housing. We estimate the potential value of hedges in reducing risk to households, yet yielding the same investment returns. The value is surprisingly large, especially to poorer homeowners.

The Choice of Methodology for Computing Housing Price Indexes: Comparisons of Temporal Aggregation and Sample Definition

Housing transactions are executed and recorded daily, but are routinely pooled into longer time periods for the measurement and analysis of housing price trends. We utilize an unusually rich data set, covering essentially all arms length housing sales in Sweden for a dozen years, in an attempt to understand the effect of temporal aggregation upon estimates of housing prices and their volatilities. This rich data set also provides a unique opportunity to compare the results using the conventional weighted repeat sales model (WRS) to those based on a research strategy which incorporates all available information on house sales. The results indicate the clear importance of temporal disaggregation in the estimation of housing prices and volatilities—regardless of the model employed.The appropriately disaggregated model is then used as a benchmark to compare estimates of the course of housing prices produced by the two models during the twelve year period 1981–1993. These results indicate that much of the difference between estimates of price movements can be attributed to the data limitations which are inherent in the repeat sales approach. The results, thus, suggest caution in the interpretation of government-produced price indices or those produced by private firms based on the repeated sales model.

Swedish Business Cycles : 1861-1988

Abstract We examine Swedish business cycle data for 1861–1988 in the time domain as well as in the frequency domain. There is evidence of a business cycle in the form of considerable spectral mass for cycles between three and eight years. The variability of the series varies considerably over time: for most series it is highest in the inter-war period. Relative variability is fairly stable over time: cross-section ratios between moving standard deviations for the series do not change much. Comovements are also stable over time: correlation coefficients do not change much either.

Moving costs and housing demand : Are recent movers really in equilibrium?

Abstract Several recent housing demand studies use samples of recent movers based on the presumption that only such households are on their demand curves. We find, contrary to this presumption, that the absolute values of the residuals from a standard housing demand equation fall with duration in the present dwelling. This shows that the correlation pattern between housing and the explanatory variables at the moving date does not correspond to the average pattern over a typical housing spell. We interpret this as evidence of forward-looking behavior and show how it may be handled in econometric work with cross-section samples.

Taxing Residential Housing Capital

This paper discusses the main aspects of the taxation of housing drawing on general principles of optimal taxation. It focuses on the role of the property tax in achieving neutrality between rental and owner-occupied housing. Assuming that landlords are taxed according to a neutral profits tax, it follows that the property tax should be based on the rate of interest. The paper discusses how the tax rate could be adjusted to account for the lack of effective taxation of capital gains, the double taxation of dividends and the differences in the cost of labour between rental and owner-occupied housing. In most OECD countries, the combined effect of the different housing taxes amounts to a tax subsidy to owner-occupied housing. It is demonstrated how this subsidy has been reduced in Sweden—as in many other countries—in the past decade as a result of tax reforms and a lower rate of inflation. The subsidy has effects on consumption patterns, saving, capital accumulation, the distribution of welfare across generations and the allocation of risks. The paper provides a brief overview of the literature, trying to quantify some of these effects. Finally, a number of problems are noted in the practical application of a property tax.

The demand for housing in Sweden: Equilibrium choice of tenure and type of dwelling

Abstract Most studies of housing demand and tenure choice only identify two modes of tenure: owner-occupied one-family houses and rental apartments. Furthermore they are typically based on a cross section across all households. In this study we use recent Swedish data to overcome these weaknesses. We identify owner-occupied apartments (coop shares) as a third mode of tenure, and show that this should be treated separately. We also use information about the households own assessment of its probability of moving during the next year. We demonstrate that it makes a large difference if likely movers are eliminated from the sample.

Money and Banking in a Cash-In-Advance Economy

This paper studies banking and financial innovations in a stochasti c general equilibrium model, assuming the existence of two distinct types of goods: cash goods, which can only be purchased by cash, and check goods, which can also be purchased by checks drawn against interest-bearing bank accounts. The authors analyze the effects of changes in the payment s structure (i.e., the share of check goods), reserve requirements on banks, and changes in the supply of reserves. The authors find, e.g., that an increased share of check goods and a decrease of the bank reserve ratio in general both lead to a decrease in the variance of the price level. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Housing prices and tenure choice with asymmetric taxes and progressivity

Abstract This paper studies the effects of tax schedule changes on prices and tenure choice in the housing market. It is shown that, given the present asymmetric treatment of owner-occupants vs. renters, an increase in the degree of progressivity is likely to lead to an increasein the prices of both owner-occupied and rental housing. A numerical example indicates that the effects may be quite large. Equilibrium prices are calculated based on the actual Swedish income tax schedules for 1971 and 1979. According to these simulations the tax changes that took place between these years caused the price of owner-occupied houses to increase by around 30 percent, and the rent level to increase by 2 or 3 percent.

A microsimulation model of Swedish housing demand

Abstract This paper presents a microsimulation model of housing demand aimed at analyzing effects of changes in tax schedules. Like many other countries, Swedens income tax laws treat homeowners and renters asymmetrically. Therefore most changes in tax laws will affect housing demand and tenure choice. We develop a microsimulation model which generates consistent estimates of the mean and variance of total housing demand and show that commonly used measures like analytic elasticities evaluated at mean values of the exogenous variables can yield very misleading predictions. Our model can be used to simulate almost any change in the tax system; here we report results of three simple experiments, one of which is a change in the rate at which imputed income from owner-occupied housing is taxed.

Transaction costs, capital-gains taxes, and housing demand

Abstract The paper considers the effect of transaction costs—particularly in the form of capital-gains taxes—on the aggregate demand for owner-occupied housing. The framework is an overlapping-generations model, where consumers can avoid the transaction costs (taxes) by keeping the same house for both periods of life. The first part of the paper analyzes the consumers choice problem. It distinguishes between costs that are fixed irrespective of the size of the house bought or sold, and costs such as capital-gains taxes that are related to the house value. It is shown that higher transaction costs have lock-in effects, inducing consumers to keep the same house for both periods. Also it is found that under a wide variety of circumstances the amount of housing demanded will increase as the household is being locked in. Finally, the paper looks at the effects on aggregate demand from an increase in capital-gains taxes. It is shown that an increased rate of taxation decreases demand for low tax rates. But for high tax rates, when lock-in effects become important, one generally gets the opposite effect; high tax rates tend to increase housing demand.