The effect of maintenance charges on housing prices in Finland
School of Business | Master's thesis
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AbstractA major part of the Finnish households’ wealth lies on the housing market, and thus the valuation of dwellings concerns most Finnish people. There are an endless number of factors affecting the valuation of dwellings, of which the maintenance charge has been widely disregarded in the research. The relatively unique Finnish housing company system is the main cause of the ignoration. To our knowledge, we are the first to focus particularly on studying to what extent the maintenance charges are capitalized in the dwelling prices in our unique home market. This thesis has notable significance by improving the efficiency of the Finnish housing market. Efficient pricing of the dwellings reduces the spread between the bid and ask prices and eventually improves liquidity in the market. We approach the research topic with the hedonic pricing method. Focus is set on Finnish dwelling transactions in apartment buildings and row houses between January 2000 and March 2021. The analysis is done using an extensive dataset provided by the Federation of Real Estate Agency. Our main findings show that the maintenance charges are not capitalized to the dwelling prices in a significant extent as a one euro increase (decrease) in the monthly maintenance charge per square meter decreases (increases) the dwelling price per square meter by only 28 euros in apartment buildings and 22 euros in row houses on average. These numbers translate to extremely high implied discount rates of 43 % and 55 % when discounting to perpetuity, respectively. The analysis also shows that the high implied discount rates are mainly driven by the largest municipalities in which no capitalization of the maintenance charges on dwelling prices seem to appear. In practice, the results mean that the dwellings are overpriced with respect to the maintenance charges. Our results are probably driven by several behavioral biases, to which the housing market is particularly vulnerable to. One considering of buying a dwelling should carefully consider the level of the maintenance charges and focus on dwellings with low charges.
Thesis advisorRantapuska, Elias
hedonic pricing, housing valuation, housing market, maintenance charge