Irregularities in the Copenhagen Housing Market: A User Cost Investigation of Equilibrium prices

Kenneth Schroeder

Student thesis: Master thesis

Abstract

House prices in Copenhagen have increased massively recently and are now close to have fully recovered fromthe drop in prices following the Global Financial Crisis. There appears to be a distortion to the equilibriumprices between traditional Owner Occupations and Collective Ownerships, because Owner Occupations arepriced at the open market and Collective Ownerships are priced through a government regulated maximumprice. This distortion of equilibrium prices is claimed to result in, that agents on the housing market areeffectively trying to bring the price to equilibrium by illegally paying a higher price for the underpricedCollective Ownerships.This paper aims to illuminate this specific problem, and explores the role of the pricing mechanisms andequilibriums, through the perspective of the User Cost model. The User Costs model is discussed and furtherdeveloped throughout the paper, and is by the end modified to take compounded house price increases andthe Net Present Value of User Cost into account. The findings of the thesis support the prediction, thatCollective Ownerships are in fact underpriced and that the long term present value equilibrium price is abovethe government regulated maximum price, exposing that the foundation for paying above the legal price ispresent.The enhanced User Cost model further concludes, that both types of housing have negative User Costs whenthe expected house price increase continues with the same rate as it has done over the last 10 years. Contraryto the expectations of the author, the results are concluding that Collective Ownerships have the lowestdiscounted User Cost over the period, regardless of the level of house price increases, leading to the conclusionthat not only are the Collective Ownerships underpriced, but in addition that they should have a higher pricethan Owner Occupations.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2016
Number of pages119