The valuation of residential rental options
2009 (English)Report (Other academic)
This paper develops a formula for pricing a residential option with respect to a tenant’s so called outside option in which two new parameters are introduced; the tenant’s transactioncost of moving and moving threshold. This formula is then used to compute numerical examples of the option price for different parameter values. We believe that the pricingformula developed in this paper provides a potentially useful way of conceptualizing howhouseholds actually might think when considering buying an option. The numerical examples show that the value of the option increases with higher transaction cost of moving, and decreases with higher moving threshold. With a low moving threshold (i.e. a liquidityconstrained household) and/or a high transaction cost of moving, the rental option may have a high value for this household. This value might therefore be higher than the option value calculated the standard way, i.e. without the transaction cost of moving, and moving thresholdparameters. Naturally, the opposite situation occurs for a household with a high moving threshold and/or a low transaction cost of moving.
Place, publisher, year, edition, pages
2009. , 44 p.
rent regulation, rent control, rent insurance, rental option, real option
Civil Engineering Economics
IdentifiersURN: urn:nbn:se:kth:diva-11237OAI: oai:DiVA.org:kth-11237DiVA: diva2:248801
QC 201008102009-10-092009-10-092010-11-30Bibliographically approved