Tenure flexibility and the supply of private rental housing

This paper examines the decision by an owner on whether to sell of let a dwelling not used by the owner's family. The paper shows that both qualitatively and quantitatively different conclusions are drawn from an analysis under certainty compared to one within a dynamic stochastic framework, even when the owners are assumed to be risk neutral. The paper emphasises that when the decision on selling or letting is analysed, the value of future flexibility of the 'let'-strategy should be taken into account. The value of future flexibility might be denoted a real option value. When account is taken of the real option value, the reservation rent of a potential landlord may be lower than the user cost of a similar dwelling. (C) 2000 Elsevier Science BN. All rights reserved.