Strategic Behaviour in Tenure Conversion: Moral Hazard in the Swedish Housing Sector

Purpose - Recent evidence finds that monthly fees paid by owner-tenants in cooperative housing are kept artificially low in newly established cooperatively owned apartment complexes as compared to already established ones. This finding has been accredited to the lack of knowledge about future renovation needs of the building by their occupants, thus resulting in optimistic net present values of future costs and consequently in property management fees lower than they ought to be. However, the fact that the division of over-estimated and under-estimated fees is not close to unity points to the presence of some other underlying factor contributing to what is observed. One possible, and we argue, more credible explanation is that the tenant-owner agents of the cooperative who are involved in the tenure conversion process from rental ownership act strategically with the aim of profit maximizing for personal gain. As Swedish law requires that 70 percent of the households be in favor before a conversion can take place there is an incentive for the agents to strategically keep artificially low fees so as to acquire the 70 percent acceptance as lower fees will seem more beneficial to the uninformed occupant. The second incentive is a result of a conflict between short- and long-term interests. Some agents view their apartment mainly as a good where you intend to live for a long period of time, while others view it as an investment opportunity to be sold within a short period of time. If the driving forces behind the transfer of ownership are conceived out of short-term interests there will be an incentive to keep fees lower in order to attract a higher sales price in the immediate future. The aim of this paper is explore the existence of such strategic behavior in the market. Methodology – Quantitative analysis of sales data over a 10 year period as well as a case study of recent converted objects. Originality/value – Correctly understanding the underlying forces to this problem is important for a well-functioning market. New buyers are concerned with the monthly expenses. Artificially low fees lead to allocation inefficiencies in the market with tenants over-paying and thus buying the 'wrong' apartment. If this is due to lack of information, it might be warranted to educate those who take part in the transfer of ownership. If this is due to strategic behavior, it might be warranted with some sort of governmental intervention to protect buyers.