The Transitory and Legacy Effects of the Rental Externality on House Price and Liquidity

Abstract

It is widely believed that tenant-occupied houses do not show as well as owner-occupied or even vacant units and so are harder to sell. These short term or transitory marketing effects should disappear in subsequent sales by owner-occupiers. Overuse by tenants and poor maintenance by landlords, however may lead to longer term or legacy effects on value and liquidity. We use a 20 year data series on house transactions to estimate these separate effects in a simultaneous model of price and liquidity. The results reveal strong transitory renter effects on both value and liquidity consistent with lower buyer willingness-to-pay. We do not find persistent legacy effects from prior use as rental property. Instead, there appears to be unmeasured quality or a characteristic common to houses suitable for rent that leads to permanently lower market values regardless of previous use in that capacity. © 2010 Springer Science+Business Media, LLC.

Publication Title

Journal of Real Estate Finance and Economics

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