The assignment is an International Real Estate Investment course. The (3) attachments are the Reding Articles. there should be one page or less summary for each article - major takeaways. They shouldn't be long narratives just key points1. Basicoutline/purpose of article
2. Findings
3. Applications
Dead line is important
392150 105..129 Rent control and vacancies in Sweden Mats Wilhelmsson Center for Banking and Finance, KTH Royal Institute of Technology, Stockholm, Sweden, and Roland Andersson and Kerstin Klingborg Real Estate Economics, Real Estate Management, KTH Royal Institute of Technology, Stockholm, Sweden Abstract Purpose – The purpose of this paper is to analyze the effects of Swedish rent controls on observed vacancy rates for rental housing. Design/methodology/approach – Housing vacancy rates are unevenly distributed among Swedish municipalities. In large expansive municipalities, such as Malmö, Göteborg and Stockholm, vacancy rates are very low, while in declining or smaller municipalities such as those in the northern and interior parts of Sweden, vacancy rates are considerably higher. This implies welfare losses not only in growing municipalities with queues for rental apartments but also in municipalities that are shrinking since the controlled rents there are higher than market rents and cause higher vacancy rates than with market rents. The authors estimate the influences of various determining factors, such as population growth, population size, rent levels, construction, demolition and market orientation of rents, on the observed vacancy rates. Findings – The authors find that that these factors affect the vacancy rates differently depending on whether a municipality is large or small, growing or shrinking. Population growth, in percent per year, plays an important role in explaining the observed vacancy rates in declining regions. Research limitations/implications – A research task that remains to be done is to calculate the welfare losses due to rent higher than the market rent for municipalities in contraction. Practical implications – To reduce the welfare losses of rent control, both in expanding and contracting municipalities, economists’ straightforward recommendation to deregulate the rent control should, in principle, be carried out. Originality/value – In many countries, rent control regulations are limited to cities, such as New York City. The paper shows that the Swedish rent control system however, applies nationwide, except for annual rent increases, which are set locally through negotiation. Keywords Sweden, Housing, Rent controls, Regional development, Market forces Paper type Research paper 1. Introduction The issue of housing vacancies under rent control has been nearly ignored in the literature. This is probably because vacancies are not usually a major problem under a rent control regime for rental apartments. Rather, housing shortages with their associated queues are considered a more interesting consequence. In the Swedish case, we argue that we can add another important consequence: inefficiently high vacancy rates caused by rents above market rents (RAMR). The Swedish rent control system is nationwide. There are housing shortages and long queues for rental apartments in the larger cities. However, in smaller municipalities, actual vacancy rates for rental apartments are often high to very high and could remain so for a long time. The current issue and full text archive of this journal is available at www.emeraldinsight.com/1753-8270.htm Rent control and vacancies in Sweden 105 Received 11 August 2010 Revised 24 November 2010 Accepted 25 November 2010 International Journal of Housing Markets and Analysis Vol. 4 No. 2, 2011 pp. 105-129 q Emerald Group Publishing Limited 1753-8270 DOI 10.1108/17538271111137903 Our first aim in this paper is to analyze theoretically the vacancy rates, distinguishing between growing and shrinking municipalities. Our second aim is to test empirically whether the observed vacancy rates are mainly determined by factors such as population growth, population size, rent levels, income and construction and demolition of dwellings. Since the yearly increases in rent levels are due to local negotiations, we also test for local market orientated rents. We have organized the paper as follows. First, we present a review of the literature. Then we briefly describe the Swedish rent control system. We analyze the effects of rent control, distinguishing between time periods, large or growing and small or shrinking municipalities. We then estimate the influences of various determining variables on the observed vacancy rates. In addition, we simulate vacancy rates under the assumption of full market orientation in rent levels. We finish with a summary and our conclusions. 2. Literature review There have been quite a number of analyses of rent controls in the literature (Lindbeck, 1967; Fallis and Smith, 1984; Arnott, 1988, 1995, 2003; Gyourko and Linneman, 1989, 1990b; Ault et al., 1994; Benjamin and Sirmans, 1994; Nagy, 1995; Glaeser et al., 2001; Igarashi and Arnott, 2000; Gabriel and Nothaft, 2001; Munch and Svarer, 2002; Glaeser and Luttmer, 2003; Hubert, 1991, 1993, 2003; Lind, 2003). Turner and Malpezzi (2003) provide an extensive literature review. In general, researchers claim that rent controls are unambiguously harmful. For instance, Lindbeck (1967) points out that a rent control system, such as the Swedish type leads to welfare losses through housing shortages caused by a combination of high demand at the controlled, low, rent level and a low construction rate due to lack of economic incentives for landlords. Gyourko and Linneman (1990a) have found a lack of maintenance due to rent control in New York City. A number of researchers such as Gyourko and Linneman (1989), Ault et al. (1994) and Nagy (1995) have investigated the issue of how rent control affects mobility. Using Danish data, Munch and Svarer (2002) found that rent control seriously hampers the efficiency of the housing market by clearly reducing tenancy mobility. Arnott (1988) summarizes what he calls the intellectual background to rent control. Economists’ prevailing view of rent control in the past (based mainly on the experience of what Arnott calls the first generation rent controls) is that it is unambiguously harmful. In addition, Arnott (1995) has found that “rent controls have been harmful and have seriously impeded the functioning of the housing economy”. Nevertheless, he believes that the very critical view towards rent control should be subject to some revision. Market imperfections, such as landlords’ monopsony power, which leads the market to provide insufficient security of tenure, should be recognized. Such insecurity “seriously undermines the quality of life of many of the less advantaged in society” (Arnott, 2003, p. 117). In particular, he points out the benefit of rent control for the tenants as a safeguard against landlords’ high-short-run rent increases by stating that the assumption of housing markets being perfectly competitive is highly unrealistic. Such views should be subject to some revision by considering mild so-called third generation rent controls, such as tenancy rent control (Arnott, 2003). Hubert (2003, p. 68) distinguishes between the “transfer model” of rent control related to wartime emergencies and the “regulated tenure” with considerable security of tenure but little or no restrictions on the initial rent. Like Arnott (2003, p. 71), he points out that “features of monopolistic competition could exist that may justify for rent control IJHMA 4,2 106 as a correction for distortions resulting from landlords market power”. He believes that some kind of mild rent control could be a way of protecting naı̈ve tenants against clever landlords. In his comment on Hubert’s paper, Ellingsen points out that rent control “primarily serves insiders at the outsiders’ expense and frequently does more harm than good” (Arnott, 2003, p. 83). Both Arnott and Hubert claim that in an imperfectly competitive market a mild form of rent regulation would be advantageous as it counteracts monopoly prices. According to classical welfare analysis of rent control, the primary welfare cost derives from the undersupply of apartments (Mills and Hamilton, 1994, p. 269). However, as Glaeser and Luttmer (2003) show, the total welfare loss from rent control is potentially much larger than the standard textbook deadweight triangle resulting from the mismatch in willingness to pay between the customers without apartments and the tenants with apartments (see Andersson and Söderberg (2009) for a similar analysis). In a world with perfect foresight with no matching problems and no rent control, demand equals supply in equilibrium. However, in the real world, landlords and tenants do not have perfect foresight and there are matching problems since it takes a while for landlords to search for suitable tenants and for tenants to search for suitable residences. If demand is expected to rise in the future, a large inventory of vacant space may optimize the values of the properties for the landlords. The vacant space represents a call option on leased space and since option values increase with underlying volatility, greater demand volatility will lead to a greater natural vacancy rate (Grenadier, 1995, 1996; Gunnelin, 2000). Landlords are willing to accept the costs of leaving some of their units vacant, if they are convinced that they can recover these costs by charging higher rents on units contracted in the time being or later (Hendershott and Haurin, 1988). When a region is expected to grow, landlords are willing to keep a large buffer of apartments by overbuilding. The greater the degree of heterogeneity in property characteristics, the more difficult the matching process between the rental space and tenants will be. Longer duration of vacancy (length of time that a unit remains in vacant status) and higher incidence of leases (probability that a unit becomes vacant) will lead to a larger buffer (Gabriel and Nothaft, 2001; Deng et al., 2003). These circumstances have led to the concept of the natural rate of vacancy being used in the literature as the optimal vacancy rate of buffer in a long-run equilibrium (Rosen and Smith, 1983). Colwell (2002) presents a development of the DiPasquale-Wheaton model (1994) by explicitly introducing the concepts of expectations and vacancies. Then, besides the transaction component referred to as the concept of natural vacancy rate he introduces what he calls the speculative component that will allow for fluctuations in vacancy around natural vacancy. However, the concept of natural vacancy is defined in relation to market equilibrium situations. As we analyze highly regulated markets, the concept of natural vacancy rate will not be used here. Instead, the actual vacancy rates are quantified and explained. Hwang and Quigley (2006) investigated the effects of exogenous national and regional economic conditions on outcomes in the single-family housing market: housing prices, vacancies and residential construction activity. The results provide detailed evidence on the importance of vacancies in the owner-occupied housing market on housing prices and supplier activity. Edelstein and Tsang developed and tested a model for residential housing market cyclical dynamics. Their empirical analyses suggest that fundamentals such as employment growth and interest rates are key determinants Rent control and vacancies in Sweden 107 of the residential real estate cycles but local fundamentals tend to have greater cyclical impacts than those of national or regional fundamentals. Recently, Nordvik and Gulbrandsen (2009) presented a paper on regional patterns in vacancies investigating what determines the exit rates from the housing stock in use and what determines the utilization of vacant housing units. They found that the growth in the stock of vacant housing correlates positively with the share of inhabitants aged 65 years or over