An Alpha in Affordable Housing?

Abstract

Residential properties with the lowest rent levels provide the highest investment returns to their owners. Using detailed rent, cost, and price data from the United States, Belgium, and The Netherlands, we show that this phenomenon holds across housing markets and time. If anything, low-rent units hedge business cycle risk. We also find no evidence for differential regulatory risk exposure. We document segmentation of investors, with large corporate landlords shying away from the low-tier segment possibly for reputational reasons. Financial constraints prevent renters from purchasing their property and medium-sized landlords from scaling up, sustaining excess risk-adjusted returns. Low-income tenants ultimately pay the price for this segmentation in the form of a high rent burden.

Keywords: affordable housing, rental market, risk and return in housing, market segmentation