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The valuation of residential rental options
KTH, School of Architecture and the Built Environment (ABE), Real Estate and Construction Management.ORCID iD: 0000-0003-4849-0726
2009 (English)Report (Other academic)
Abstract [en]

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.
Keyword [en]
rent regulation, rent control, rent insurance, rental option, real option
National Category
Civil Engineering Economics
URN: urn:nbn:se:kth:diva-11237OAI: diva2:248801
QC 20100810Available from: 2009-10-09 Created: 2009-10-09 Last updated: 2010-11-30Bibliographically approved
In thesis
1. Essays on risk and housing
Open this publication in new window or tab >>Essays on risk and housing
2009 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

There is a series of different types of risk on the housing market and related industries.  The six papers in this doctoral dissertation are about a number of the many dimensions of risk management on the housing market. The main message of this thesis is that it should be possible for different actors in the housing market to improve risk management. Indeed, the last years’ financial turmoil has revealed that it should not only be possible, but also necessary, to improve risk management at all levels of the economy: at household, corporate, regional, national and international level. Although the complexity of the environment in which we live and act makes it very difficult to predict and quantify risk, the development of risk management techniques should make it possible to better indentify, and reduce risk.

The first paper provides a systematic overview of a wide selection of methods or strategies used in different countries to expand but also to maintain home ownership among low income households. The second paper further discusses mortgage and home equity insurance instruments discussed in the first paper. This paper also discusses how a rental insurance policy, as an alternative to traditional rent regulation, may be constructed. Paper 3 develops a formula that might be used in order to value the rental insurance option discussed in paper 2. The fourth paper focuses on the housing building sector by discussing potential benefits of strategic alliances that the different actors in the housing construction market may establish in order to pool resources and manage development risks. The challenge of constructing reliable home price indexes has attracted scholars for many years. Paper 5 develops monthly quality-adjusted price indexes for condominiums (housing cooperative apartments) based on a unique dataset covering sales in the whole of Stockholm municipality from January 2005 to June 2009. Finally paper 6 pays attention to the large increase in housing cooperative conversions sine the 1990s, by deriving a closed-form valuation formula that might be used to value the embedded option an owner of a multi-family rental property has to sell it to a housing cooperative.

Place, publisher, year, edition, pages
Stockholm: KTH, 2009. xv p.
Trita-BFE, ISSN 1104-4101 ; 2009 : 87
housing risks, risk management, strategic alliances, housing construction, low-income housing, real options, tenure choice, rent regulation, housing cooperative conversion, price index
National Category
Economics Economics Economic Geography
urn:nbn:se:kth:diva-11233 (URN)978-91-977302-4-2 (ISBN)
Public defence
2009-10-28, V2, Teknikringen 76, KTH, Stockholm, 13:00 (English)
QC 20100810Available from: 2009-10-08 Created: 2009-10-07 Last updated: 2010-08-10Bibliographically approved
2. Risk management of the housing market: with a focus on low income households
Open this publication in new window or tab >>Risk management of the housing market: with a focus on low income households
2005 (English)Licentiate thesis, comprehensive summary (Other scientific)
Place, publisher, year, edition, pages
Stockholm: KTH, 2005. iv p.
Trita-BFE, ISSN 1104-4101 ; 05:67
National Category
Other Mechanical Engineering
urn:nbn:se:kth:diva-398 (URN)91-975358-5-0 (ISBN)
QC 20101130Available from: 2005-08-16 Created: 2005-08-16 Last updated: 2010-11-30Bibliographically approved

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