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

3. StartEnd 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

4. StartEnd 3 Introduction Source: www.jp.dkwww.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

5. StartEnd 4 Some facts from Denmark Some facts

6. StartEnd 5 Some facts from Denmark Some facts

7. StartEnd 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

8. StartEnd 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

9. StartEnd 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?

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

11. StartEnd 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

12. StartEnd 11 Pseudo-panel Deaton (1985) Panel data from time series of cross sections, Journal of Econometrics 30, 109-126 Result It is possible to construct a ”pseudo-panel” –Year of birth It is possible to include macro-variables Pseudo-panel

13. StartEnd 12 Pseudo-panel Deaton (1985) Panel data from time series of cross sections, Journal of Econometrics 30, 109-126 Result It is possible to construct a ”pseudo-panel” –Year of birth It is possible to include macro-variables Pseudo-panel

14. StartEnd 13 Observations Cohort.Year of birthUrban – owner Rural - ownerUrban – tenantRural - tenant 1 2 3 4 5 6 7 8 9 10 11 1920-24 1925-29 1930-34 1935-39 1940-44 1945-49 1950-54 1955-59 1960-64 1965-69 1970-74 479 713 906 1079 1463 1772 1530 1592 1593 1543 1125 1323 2079 2565 3214 4254 5184 4818 4567 4458 3831 2104 688 767 720 715 714 800 702 834 1093 1608 2162 482 617 519 475 510 604 584 610 749 1030 1299 Average12543491982680

15. StartEnd 14 Car availability – real estate owners Some information

16. StartEnd 15 Car availability – tenants Some information

17. StartEnd 16 Model variables VariabelSourceDescription Cars Income (log) Adults Cohort Increasing value Interest rate Urbanization TU DST TU Number of cars in the household Total household income Number of adults in the household Cohort number Last years increase in real estate value 30-year interest rate Living in urban area

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

19. StartEnd 18 Estimates Estimation VariableM-allM-ownersM-tenants Intercept Real estate owner Urbanization Value increase Interest rate Income (log) Generation (cohort) Adults Cars (t-1) AR1 (β γ ) R 2 Log Likelihood SSE MSE -0.1815 (-1.30) 0.0650 (6.10) -0.0625 (-5.36) 0.0003 (2.46) -0.0458 (-4.84) 0.0756 (3.99) 0.0040 (3.36) 0.0659 (4.50) 0.7221 (21.39) 0.2872 (4.90) 0.9966 -305.8879 131.3977 0.4409 -0.2403 (-0.76) -0.0968 (-4.17) 0.0007 (3.05) -0.0565 (-4.18) 0.1105 (4.20) 0.0036 (2.27) 0.0627 (3.50) 0.6737 (13.53) 0.2270 (2.55) 0.9958 -160.8236 72.7733 0.5019 -0.0239 (-0.08) -0.0524 (-3.08) -0.0002 (-0.95) -0.0564 (-3.56) 0.1040 (2.82) 0.0030 (1.14) 0.0490 (1.31) 0.6797 (12.09) 0.3941 (4.91) 0.9486 -135.0271 52.0174 0.3587

20. StartEnd 19 Estimates VariableM-ruralM-urban Intercept Real estate owner Value increase Interest rate Income (log) Generation (cohort) Adults Cars (t-1) AR1 (β γ ) R 2 Log Likelihood SSE MSE -0.8894 (-3.32) 0.1145 (6.41) -0.0799 (-5.42) 0.0009 (3.33) 0.1589 (5.62) 0.0075 (4.91) 0.0932 (5.37) 0.4280 (6.86) 0.1426 (1.58) 0.9971 -132.9520 50.6830 0.3495 -0.6061 (-1.99) 0.0668 (4.30) -0.0685 (-4.44) 0.0000 (0.18) 0.1188 (3.64) -0.0028 (-1.02) 0.0656 (2.15) 0.6936 (11.93) 0.3782 (4.65) 0.9800 -148.6676 62.1046 0.4283 Estimation

21. StartEnd 20 Income elasticities Elasticities M-ownersM-tenants Mean car availability in the group [1] [1] Short term 0.1008 Long term 0.3090 Short term 0.1952 Long term 0.6094 [1] [1] The average for real estate owners is 1.0960 cars and for tenants it is 0.5326. M-ruralM-urban Mean car availability in the group [1] [1] Short term 0.1506 Long term 0.2631 Short term 0,1653 Long term 0.5395 [1] [1] The total average for rural households is 1.0549 cars and for urban hosueholds it is 0.7188.

22. StartEnd 21 Other elasticities Interest rateReal estate values Real estate owners Tenants Low increase (100.000 DKr.) High increase (300.000 DKr.) Short term -0.2576 -0.5395 Long term -0.7902 -1.6843 Short term 0.0639 0.1916 Long term 0.1958 0.5873 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

23. StartEnd 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

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