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Real estate ownership and the demand for cars in Denmark - A pseudo-panel analysis

COST 11-10-2006. Real estate ownership and the demand for cars in Denmark - A pseudo-panel analysis. Jens Erik Nielsen jen@dtf.dk. Introduction. What affects the demand for cars? Income Household structure (adults and children) Urbanization Access to public transport

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Real estate ownership and the demand for cars in Denmark - A pseudo-panel analysis

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  1. COST 11-10-2006 Real estate ownership and the demand for cars in Denmark- A pseudo-panel analysis Jens Erik Nielsenjen@dtf.dk

  2. Introduction • What affects the demand for cars? • Income • Household structure (adults and children) • Urbanization • Access to public transport • But what about ‘wealth’ • In Denmark the housing prices have increased drastically during the last 10 years • The interest rate have dropped from around 10% to around 5% in 10 years • This means that it is possible to capitalize the wealth accumulated in the households and this can be done without increasing the monthly mortgage payments. Intro

  3. Introduction Source: www.jp.dk We see large differences in the development in housing prices in Denmark Largest increases in the large cities Small increases (or falling) in small cities and on the countryside Intro

  4. Some facts from Denmark Some facts

  5. Some facts from Denmark Some facts

  6. An example • Initial situation: • Need 1.000.000 DKr. In 30-year bond with annual interest rate of 8% • Value of the bond: 98 • You need to borrow: 1.020.408 • Mortgage payments per year: 90.640 • New situation (after 3 years) • Value of real estate: 1.300.000 DKr. • Have paid back some money and has debt of 979.818 DKr. • You have accumulated 320.192 DKr. • The 30-year bond now has 27 years left. Value of the bond is now 105 but you can always pay back at 100. • The interest rate has dropped to 6% • Value of new bond is: 100 Example

  7. An example • Situation now • Wealth accumulated in real estate: 320.192 DKr. • Interest rate: 6% • Value of 30-year bond: 10 • Yearly mortgage payment: 90.640 • How much can the household borrow without increasing its expenses? • Maximum debt: 1.247.647 DKr. • Value of real estate: 1.300.000 DKr. • Remaining debt: 979.818 DKr. • The household can capitalize: 267.829 DKr. (appr. 35.000 Euro) Example

  8. Can economic theory help? • Investment theory? • One asset increase in value. • In order to keep the same risk-profile one has to diversify the investment • Households are short-sighted • Households only care about monthly expenses. • The total debt is not important • As the example showed: Households get “free money”. Theory?

  9. The question? • Have the following influenced car demand in Denmark: • Increasing real estate prices • Falling interest rate The question

  10. The Data • Danish Transport Diary Survey • Number of cars in households • Income • Number of adults and number of children • Cohort • Municipality • Real estate owner or tenant • Statistics Denmark • Average value of real estate in municipalities • Annual interest rate The data

  11. Pseudo-panel • Deaton (1985) Panel data from time series of cross sections, Journal of Econometrics30, 109-126 • Result • It is possible to construct a ”pseudo-panel” • Year of birth • It is possible to include macro-variables Pseudo-panel

  12. Pseudo-panel • Deaton (1985) Panel data from time series of cross sections, Journal of Econometrics30, 109-126 • Result • It is possible to construct a ”pseudo-panel” • Year of birth • It is possible to include macro-variables Pseudo-panel

  13. Observations Observations

  14. Car availability – real estate owners Some information

  15. Car availability – tenants Some information

  16. Model variables Model variables

  17. The model • C: cars • Y: income • W: real estate value • R: interest rate • I: adults • G: Cohort • U: urbanization The model

  18. Estimates Estimation

  19. Estimates Estimation

  20. Income elasticities [1] The average for real estate owners is 1.0960 cars and for tenants it is 0.5326. [1] The total average for rural households is 1.0549 cars and for urban hosueholds it is 0.7188. Elasticities

  21. Other elasticities The average for real estate owners is 1.0960 cars and for tenants it is 0.5326. The average increase in housing prices in the period has been around 200.000 DKr. per year. The interest rate is assumed to be 5%. Elasticities

  22. Conclusion • Rising real estate values have increased car ownership for real estate owners. • Rising real estate values have not affected tenants • Both real estate owners and tenants have increased their car ownership due to the falling interest rate • BUT • It would be nice to have register data to investigate further • Moving patterns are not included • The elasticities for the increasing real estate prices seems high • Income elasticities seems to be low • We do not accound for correlation between real estate prices and interest rate • A theoretical model is needed End

  23. http://www.dtf.dk Thank you for your attention! Jens Erik Nielsen jen@dtf.dk

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