4.6 Results
4.6.2 Robustness Checks
One concern regarding the analysis, is the choice of control group. One way to examine this is buy looking at the median residuals per quarter from the regression
priceijt=β0+βXijt+uijt (4.6) for Farum, each of the 4 surrounding municipalities, and the 4 surrounding municipalities grouped together. In equation (4.6) i indexes individual sales, t denotes time, andj municipalities. Xijt are housing characteristics such as size, number of rooms etc. Figure 4.6 depicts the residuals, i.e. the part of the prices unexplained by the housing characteristics. This indicates that the sales in the 4 surrounding municipalities grouped together tracks the prices of the houses sold in Farum better than each of the municipalities individually, when controlling for the characteristics of the houses sold. Using the group of all 4 surrounding municipalities as control group thus seems like a reasonable choice.
Another potential concern with the results is the choice to include Værløse in the control group. The concern stems from the fact that Farum and Værløse merged as part of the municipality reform that took effect on January 1st 2007.7 And even though the municipality reform was not presented until 2004, there was still a debate about the need for a reform in 2002. Hence, a potential concern could be that houses in Værøse were affected by the debt increase too.
To ameliorate this concern, Værløse is excluded from the control group in the results in table 4.8. Excluding Værøse from the control group, the estimate of the debt effect is 15.4% compared to 13.6% when including Værøse. Thus, including Værløse - if anything - understates the debt effect, further confirming the large initial debt effect on prices.
Figure 4.7 shows that the long-run results are not significantly different when excluding Værløse, and resembles figure 4.5, though the first month effect is higher.
Overall I document that local public debt do affect house prices. Further-more, I find an effect in the 3 months after the debt increase between -13.6% and 16.0%, depending on the whether the data is trimmed or not. The aggregate
7The Danish municipality reform stated basically that municipalities with less than 20,000 inhabitants should should merge with neighboring municipalities to have at least 30,000 in-habitants to better harvest economies of scale benefits.
mean effect corresponds to 100% and 118% of the total debt increase.
Also, I find that the house price reaction in the the first month after the debt increase exceeds the total debt increase by about 50%, but that the reaction is dampened over time.
4.7 Conclusion
By using the 125 million USD increase in municipal debt in the Danish mu-nicipality Farum in February 2002 as an exogenous shock to public debt, I am able to directly examine the efficiency of the residential housing market’s price reaction to the increases in local public debt. I find that the housing market initially overreacts to the debt increase, but that the overreaction is lessened over time.
Specifically, I document that local public debt do affect house prices. In the 3 months after the debt increase the house prices drop between -13.6% and 16.0%
due to the debt increase, depending on the whether the data is trimmed or not and the choice of control group. The aggregate mean effect ranges from 100%
and 118% of the total debt increase.
Moreover, I find that the house price reaction in the the first month after the debt increase exceeds the total debt increase by about 75%, but that the reaction is reduced over time. The long-run effect lies in the range of 37% to 75% of the total debt increase.
The result that public debt affects house prices is in line with Stadelmann and Eichenberger [2013] who also find that public debt influence house prices. The speed at which the housing prices react to the increased public debt indicates a very efficient housing market. The initial overreaction could be in line with the results of Deng et al. [2013] who find that the housing market irrationally reacts to news on earthquakes even though the news contain no new relevant in-formation on the risk earthquakes, however it could also indicate a fully rational housing market, if the market initially fears further debt revelations.
4.8 Figures and Tables
Figure 4.1: Map of Farum (treatment group) and the surrounding municipalities (control group).
Treatment group Control group Legend
Figure 4.2: Time line of the experiment.
Pre-event period Discovery of Fraud -debt increase
Post-event period November 2001
-January 2002
February 2002
March 2002 -May 2002
Figure 4.3: The median residuals per quarter from Farum and the 4 neighboring municipal-ities (the control group) from running the regressionP riceitj=β0+β1t+β2Xijt+uitj from 1997 till the end of 2001. From 2002 the estimated model is used to predict values and the residuals are obtained by subtracting the predicted values from the observed values.
1997 1998 1999 2000 2001 2002
−2000000200000
Farum
The 4 neighboring municipalities
Time
Residuals
Median residuals over time
Figure 4.4: The graph shows the standardized residuals against the fitted values of the regression presented in table 4.4.
13.5 14.0 14.5 15.0
-4-20246
Fitted values
Standardized residuals
Figure 4.5: The graph shows difference-in-differences estimates from running the regression in equation (4.4). The event time, t = 0, is February 2002. ** denotes rejection at the 1%
confidence level of theH0 hypothesis that the effect of debt is equal to 0.
-0.14-0.12-0.10-0.08-0.06-0.04-0.020.00
3 months before 3 months 6 months 9 months 12 months 15 months 18 months 0
-0.137**
-0.039
-0.092 -0.09
-0.048
-0.079
Time Relative change in price -0.20-0.15-0.10-0.050.00
-1 0 1 2 3 4 5 6
0
-0.236**
-0.136
-0.146
-0.052
-0.058
-0.11
Months
Relative change in price
Figure 4.6: Median residuals per quarter from the regressionpriceijt=β0+βXijt+uijt for Farum, each of the 4 surrounding municipalities, and the 4 surrounding municipalities grouped together. Xijtare housing characteristics such as size, number of rooms etc. The graph hence shows the part of the prices unexplained by the housing characteristics.
1997 1998 1999 2000 2001
−2000000200000
Farum
The 4 neighboring municipalities Birkerød
Værløse Allerød Stenløse
Time
Residuals
Median residuals over time
Table 4.1: 2001 values on select municipal tax and public service figures for Farum and the 4 surrounding municipalities in the control group. The overall tax level is a weighting of all the municipal taxes including income taxes, private property taxes, and corporate property taxes.
Net public service expenditure pr. capita is the total expenditure used on public service in the municipality in relation to the number of inhabitants. The service level is a relative measure of how much the municipality spends on service compared to the average municipality (an average municipality has a service level of 1). Monthly child care fee is the user payment for child care. Net school expenditure pr. pupil are the total expenditure used on public schools (age 6 to 16). Cultural expenditure pr. capita is the money spend on libraries, Arts and Theater etc. Expenditure on sport and leasure pr. capita covers subsidies for children’s soccer practice etc.
Farum Birkerød Værløse Allerød Stenløse
Overall tax level (%) 19.36 20.27 20.68 21.54 22.04
Net public service expenditure pr. capita 38275 26186 27375 27079 26470
Service level 1.4 1.06 1.1 1.09 1.15
Tax-service relation 0.78 0.89 0.92 0.94 0.93
Monhtly child care fee for 0-2-year olds 2189 2095 2432 2075 2030 Monhtly child care fee for 3-5-year olds 1451 1274 1346 1415 1320
Net school expenditure pr. pupil 50747 48120 43715 48796 53696
Cultural expediture pr. capita 884 286 196 533 228
Expenditure on leasure pr. capita 3291 1075 1023 1143 1049
Figure 4.7: The graph shows difference-in-differences estimates from running the regression in equation (4.4) but excluding Værløse from the control group. The event time, t = 0, is February 2002. ** denotes rejection at the 1% confidence level of theH0hypothesis that the effect of debt is equal to 0.
-0.12-0.10-0.08-0.06-0.04-0.020.00
3 months before 3 months 6 months 9 months 12 months 15 months 18 months 0
-0.126**
-0.025
-0.078
-0.063
-0.013
-0.049
Time Relative change in price -0.25-0.20-0.15-0.10-0.050.00
-1 0 1 2 3 4 5 6
0
-0.276**
-0.166 -0.158
-0.043
-0.076
-0.147
Months
Relative change in price
Table 4.2: Summary statistics for the housing sales in Farum (treatment group) and the surrounding municipalities (control group) the 3 months before the revelation of the scandal (November and December 2001 and January 2002) and the 3 months after the scandal (March, April and May 2002).
Before
Farum
Min. 1st Qu. Median Mean 3rd Qu. Max. S.D.
Distance (m) 18468 19471 19781 19913 20442 21572 793
Rooms 2 4 5 4.865 6 10 1.7
Price 785000 1580000 2025000 2450638 2557495 17500000 2633547
Size (m2) 61 120 136 146.7 171 350 57.6
Price/m2 5243 13110 14465 16514 16244 87500 12484
Age 6 30 35 40.35 42 142 25
No. of sales Apartments Townhouses Villas Total
5 9 23 37
Control group
Min. 1st Qu. Median Mean 3rd Qu. Max. S.D.
Distance (m) 2084 4713 17778 16579 25270 27538 9184
Rooms 1 4 4 4.491 5 10 1.5
Price 372000 1320314 1731811 1852258 2375000 4777777 727099
Size (m2) 46 105.2 129 133.1 159.8 267 45.4
Price/m2 3543 12255 13858 14203 16247 43074 4122
Age 1 26 33 36.8 41.75 201 23
No. of sales Apartments Townhouses Villas Total
39 52 127 218
After
Control group
Min. 1st Qu. Median Mean 3rd Qu. Max. S.D.
Distance (m) 18244 19612 19742 19787 20079 21582 672
Rooms 2 3 5 4.574 5.5 8 1.7
Price 824230 1144365 1720000 1669357 2083063 2573180 500161
Size (m2) 53 82 125 124.6 165.5 195 41.5
Price/m2 5558 12203 14254 13870 15656 21534 2887
Age 4 32 37 37.17 40 122 18
No. of sales Apartments Townhouses Villas Total
13 16 18 47
Control group
Min. 1st Qu. Median Mean 3rd Qu. Max. S.D.
Distance (m) 2066 4775 17873 16904 25480 27555 9242
Rooms 1 4 4 4.36 5 10 1.5
Price 515722 1450000 1825000 1874154 2256750 5750000 684604
Size (m2) 44 99.25 129 128.79 154 295 43.6
Price/m2 4500 12911 14791 14880 17059 24475 3445
Age 1 28 35 41.56 43 192 27
No. of sales Apartments Townhouses Villas Total
79 62 201 342
Table 4.3: Results of a simple difference-in-differences regression of equation (4.1) without housing characteristics for the properties sold 3 months before and after the debt increase. The regressand is the log sales price. The log sales price is regressed against a constant, a dummy variable equalling 1 if the sale is in Farum and 0 if it is in the control group, a dummy variable equalling 1 if the sale took place after the debt increase and 0 otherwise, and a interaction between the dummy variable indicating treatment (Farum) and the dummy variable indicating whether the sale took place after or before the debt increase. The regression is estimated by Ordinary Least Squares. *** denote significance at the 0.1% confidence level, ** significance at the 1% confidence level, and * denotes significance at the 5% confidence level.
Estimate Std. Error t-value p-value
Intercept 14.347*** 0.027 522.100 0.000
1Farum 0.175* 0.072 2.421 0.016
1After 0.027 0.035 0.775 0.439
1After·1Farum -0.270** 0.096 -2.813 0.005
R2 1.3%
Table 4.4: Results of difference-in-differences type regressions with housing characteristics as in equation (4.3) to account for quality differences in the houses sold 3 months before and after the increase in debt. The regressand is the log sales price. The log sales price is regressed against a constant, a dummy variable equalling 1 if the sale is in Farum and 0 if it is in the control group, a dummy variable equalling 1 if the property is a townhouse and 0 otherwise, a dummy variable equalling 1 if the property is a villa and 0 otherwise, the age of the property, the age of the property squared, the size of the property, the number of rooms, a dummy variable equalling 1 if the sale took place after the debt increase and 0 otherwise, and a interaction between the dummy variable indicating treatment (Farum) and the dummy variable indicating whether the sale took place after or before the debt increase. The regression is estimated by Ordinary Least Squares. *** denote significance at the 0.1% confidence level,
** significance at the 1% confidence level, and * denotes significance at the 5% confidence level.
Estimate Std. Error t-value p-value
Intercept 12.312*** 0.272 45.325 0.000
1Farum 0.178*** 0.045 3.985 0.000
1townhouse 0.174*** 0.037 4.642 0.000
1villa 0.225*** 0.038 5.970 0.000
log(Age) -0.099*** 0.018 -5.645 0.000
Age2 0.000*** 0.000 4.406 0.000
log(Size) (m2) 0.752*** 0.053 14.073 0.000
Rooms -0.025* 0.011 -2.201 0.028
log(Distance) (m) -0.143*** 0.014 -10.240 0.000
1After·1Farum -0.160** 0.059 -2.709 0.007
1After 0.064** 0.022 2.977 0.003
R2 63.6%
Table 4.5: Results of difference-in-differences type regressions with housing characteristics as table 4.4 but where data is trimmed on the price/m2 variable for the top and bottom 1%. The log sales price is regressed against a constant, a dummy variable equalling 1 if the sale is in Farum and 0 if it is in the control group, a dummy variable equalling 1 if the property is a townhouse and 0 otherwise, a dummy variable equalling 1 if the property is a villa and 0 otherwise, the age of the property, the age of the property squared, the size of the property, the number of rooms, a dummy variable equalling 1 if the sale took place after the debt increase and 0 otherwise, and a interaction between the dummy variable indicating treatment (Farum) and the dummy variable indicating whether the sale took place after or before the debt increase. The regression is estimated by Ordinary Least Squares. *** denote significance at the 0.1% confidence level, ** significance at the 1% confidence level, and * denotes significance at the 5% confidence level.
Estimate Std. Error t-value p-value
Intercept 11.954*** 0.242 49.339 0.000
1Farum 0.137*** 0.040 3.454 0.001
1townhouse 0.151*** 0.033 4.571 0.000
1villa 0.172*** 0.034 5.094 0.000
log(Age) -0.090*** 0.015 -5.912 0.000
Age2 0.000*** 0.000 3.415 0.001
log(Size) (m2) 0.802*** 0.047 16.953 0.000
Rooms -0.020* 0.010 -2.014 0.044
log(Distance) (m) -0.130*** 0.012 -10.626 0.000
1After·1Farum -0.136** 0.052 -2.624 0.009
1After 0.063*** 0.019 3.312 0.001
R2 70.2%
Table 4.6: Results of difference-in-differences type regressions with housing characteristics as table 4.4 but using the White [1980] heteroscedasticity-consistent covariance matrix estimation method. The regressand is the log sales price. The log sales price is regressed against a constant, a dummy variable equalling 1 if the sale is in Farum and 0 if it is in the control group, a dummy variable equalling 1 if the property is a townhouse and 0 otherwise, a dummy variable equalling 1 if the property is a villa and 0 otherwise, the age of the property, the age of the property squared, the size of the property, the number of rooms, a dummy variable equalling 1 if the sale took place after the debt increase and 0 otherwise, and a interaction between the dummy variable indicating treatment (Farum) and the dummy variable indicating whether the sale took place after or before the debt increase. The regression is estimated by Ordinary Least Squares. *** denote significance at the 0.1% confidence level, ** significance at the 1% confidence level, and * denotes significance at the 5% confidence level.
Estimate Std. Error t-value p-value
Intercept 12.312*** 0.308 39.941 0.000
1Farum 0.178** 0.062 2.868 0.004
1townhouse 0.174*** 0.035 5.000 0.000
1villa 0.225*** 0.038 5.989 0.000
log(Age) -0.099*** 0.017 -5.846 0.000
Age2 0.000** 0.000 2.625 0.009
log(Size) (m2) 0.752*** 0.058 12.866 0.000
Rooms -0.025* 0.011 -2.197 0.028
log(Distance) (m) -0.143*** 0.014 -10.504 0.000
1After·1Farum -0.160* 0.067 -2.367 0.018
1After 0.064** 0.022 2.903 0.004
R2 63.6%
Table 4.7: Results of difference-in-differences type regressions with housing characteristics to account for differences in the houses sold 3 months before and all the time through 2004 after the debt increase. The regressand is the log sales price. The log sales price is regressed against a constant, a dummy variable equalling 1 if the sale is in Farum and 0 if it is in the control group, a dummy variable equalling 1 if the property is a townhouse and 0 otherwise, a dummy variable equalling 1 if the property is a villa and 0 otherwise, the age of the property, the age of the property squared, the size of the property, the number of rooms, a dummy variable equalling 1 if the sale took place after the debt increase and 0 otherwise, and a interaction between the dummy variable indicating treatment (Farum) and the dummy variable indicating whether the sale took place after or before the debt increase. Data is trimmed on the price/m2 variable for the top and bottom 1%. The regression is estimated by Ordinary Least Squares.
*** denote significance at the 0.1% confidence level, ** significance at the 1% confidence level, and * denotes significance at the 5% confidence level.
Estimate Std. Error t-value p-value
Intercept 11.944*** 0.094 126.415 0.000
1Farum 0.112** 0.038 2.930 0.003
1townhouse 0.199*** 0.014 14.725 0.000
1villa 0.238*** 0.014 17.169 0.000
log(Age) -0.073*** 0.006 -12.113 0.000
Age2 0.000** 0.000 2.999 0.003
log(Size) (m2) 0.736*** 0.019 38.773 0.000
Rooms -0.009* 0.004 -2.260 0.024
log(Distance) (m) -0.110*** 0.005 -23.505 0.000
1After·1Farum -0.084* 0.040 -2.119 0.034
1After 0.090*** 0.015 6.017 0.000
R2 71.8%
Table 4.8: Results of difference-in-differences type regressions leaving out Værløse of the control group with housing characteristics to account for differences in the houses sold 3 months before and after the debt increase. The regressand is the log sales price. The log sales price is regressed against a constant, a dummy variable equalling 1 if the sale is in Farum and 0 if it is in the control group, a dummy variable equalling 1 if the property is a townhouse and 0 otherwise, a dummy variable equalling 1 if the property is a villa and 0 otherwise, the age of the property, the age of the property squared, the size of the property, the number of rooms, a dummy variable equalling 1 if the sale took place after the debt increase and 0 otherwise, and a interaction between the dummy variable indicating treatment (Farum) and the dummy variable indicating whether the sale took place after or before the debt increase. Data is trimmed on the price/m2 variable for the top and bottom 1%. The regression is estimated by Ordinary Least Squares. *** denote significance at the 0.1% confidence level, ** significance at the 1% confidence level, and * denotes significance at the 5% confidence level.
Estimate Std. Error t-value p-value
Intercept 12.221*** 0.269 45.479 0.000
1Farum 0.169*** 0.041 4.140 0.000
1townhouse 0.141*** 0.037 3.842 0.000
1villa 0.175*** 0.037 4.693 0.000
log(Age) -0.093*** 0.017 -5.463 0.000
Age2 0.000*** 0.000 3.688 0.000
log(Size) (m2) 0.746*** 0.054 13.906 0.000
Rooms -0.017 0.011 -1.558 0.120
log(Distance) (m) -0.133*** 0.013 -10.541 0.000
1After·1Farum -0.154** 0.053 -2.908 0.004
1After 0.076*** 0.022 3.469 0.001
R2 67.8%
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Conclusion
This thesis contains 4 essays concerning real estate finance. The topics of the 4 essays range from trying to understand the commonalities and differences be-tween publicly and privately traded commercial real estate and macroeconomic risk, through utilizing the special institutional nature of Real Estate Investment Trusts (REITs) to estimate the effect of corporate taxes and agency problems on the capital structure of companies, to the effect of local municipal taxes and debt on residential house prices. All 4 essays are empirical.
The first essay examines the relationship between public and privately traded commercial real estate and macroeconomic risk. I use a large macroeconomic dataset of 122 time series and extract the underlying factors. I find that the macroeconomic dataset can be efficiently described by 4 fundamental factors, which I interpret as a Recession factor, a Housing and Credit factor, an In-flation factor, and an Interest Rate factor. I use these factors along with stock market factors to explain the time series variation of publicly traded Real Estate Investment Trusts (REITs) and direct and privately traded real estate proxied by the MIT trade based index (TBI).
I find that REITs are driven by stock market factors and the interest rate factor. REITs lead private real estate, and private real estate also reacts with a lag to the interest rate factor and a recession factor. REITs and private real estate are thus related both directly through their lead-lag relationship and indirectly through a common exposure to US interest rates.
The second essay analyzes the effect of the tax advantage of debt and the mit-igating effect of debt on free cash flow agency problems on firm capital structure choices. Specifically, I examine how the two effects affect the level of leverage and the tendency of firms to have dynamic target leverage ratios that they revert to as predicted by the dynamic Trade-off theory.
which are effectively tax exempt and not prone to free cash flow agency problems, because they are required to pay out at least 90% of the taxable income as dividends and can deduct the dividends from their taxable income, to regular listed real estate companies without the REIT status (non-REITs).
I find that REITs have similar or even higher leverage ratios than similar non-REITs real estate firms. More so, I document that REITs have higher target leverage ratios than non-REITs and that the speed at which they revert to the targets are equal for the two groups. This is not line with the largest benefits of debt being the tax advantage and the reduction in free cash flow agency problems, as is often mentioned in the literature, and could suggest that firms have other benefits of debt.
The third essay is co-authored with Aleksandra Rze´znik from Copenhagen Business School. It deals with the effect of municipal income and property tax rates on residential house prices. By utilizing the 2007 municipality reform in Denmark as an exogenous shock to municipal income and property tax rates, we are able to estimate the influence of taxes on house prices.
We find that a 1%-point increase in the income tax rate lead to a drop in house prices of 7.9% and a 1-point increase in the property tax rate lead to a 1.1% drop in house prices. The simple present value of a 1%-point perpetual income tax increase and of a 1-point property tax increase, relative to the median house price correspond to 7% and 3.3%, repectively. Our findings are thus in line with predicted. This indicates that the housing market efficiently incorporates taxes into house prices.
The fourth essay examines the efficiency of the residential housing market by utilizing the 2002 case of fraud in the Danish municipality of Farum as an ex-ogenous shock to municipal debt. Using a difference-in-differences methodology with the surrounding municipalities as a control group, I find that the average house price dropped between 13.6% and 16.0% due to the debt increase in the 3 months after the debt revelation. The aggregate effect corresponds to between 100% and 118% of the total debt increase. Furthermore, I document that the ini-tial 1-month aggregate price drop equals about 175% of the total debt increase, and that the reaction is dampened in the following months to between 37% to 75% of the total debt increase. This shows that the housing market initially overreacts to the debt increase but quickly adjusts to more rational levels. The