Comparing Markets Rents from a User Cost and Reaction Model

Abstract

SUMMARYThe current policy in the Netherlands is that rents in the social housing sector are regulated and do not reflect market conditions. Housing associations are studying the possibility to partly adjust rents to the market rent, or at least they want to have insight in the size of the implicit subsidy they provide to the tenant. Market rents cannot easily derived from a hedonic price model, because the non-regulated rental market is very small, so market rents are hardly available. In this paper an alternative method of determining 'market rents' is presented, based on the number of reactions, i.e. persons that showed interest in a house conditional on the non-negotiable asking rent. When the number of reactions is relatively high, it is assumed that the fixed asking rent is lower than the market rent, and vice versa. In this model the number of reactions is explained by the rent price, the transaction date, the house value and additional variables controlling for the quality of the house, where the house value is the yearly appraised value used for property tax. The market rent is defined such that the probability of not renting the house is small, say 5%. Rents can be adjusted based on the outcomes of the model, such that the probability of not renting the house is 5%. Results are presented for different regions in the Netherlands, based on a large database containing rents, values and reactions. The results are compared to market rents that are calculated from a user cost approach.