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Rent or Mortgage-Financed Ownership: an Optimal Choice in Modern Russia

Student: Mariia Drozdetskaia

Supervisor: Konstantin Kholodilin

Faculty: St.Petersburg School of Economics and Management

Educational Programme: Economics (Bachelor)

Final Grade: 10

Year of Graduation: 2018

This paper investigates an important housing tenure choice dilemma: whether to buy or to rent accommodation. The relevance of the study is determined by the severity of the housing issue in modern Russia, which reflect in low levels of housing provision and purchasing power of the private households’ incomes. Therefore, the main purpose of this study is to determine an optimal housing tenure choice in the case of the Saint Petersburg housing market. This article comprises a comprehensive review of the literature, development of a new approach for a housing tenure decision, discussion of the expected results and conclusions. The suggested approach is based on hedonic models explaining the purchasing house price and rent formation and a net present value (NPV) model for comparing costs of renting and buying options. The uniqueness of the study consists in comparing the costs and benefits of buying and renting identical accommodations, as well as in taking into account the time value of cash flows. The results of the study show that hedonic models with spatial effects better describe the house pricing. The NPV model shows that buying with a mortgage is financially profitable only for multi-room apartments, while renting is optimal for accommodations with one or two rooms.

Full text (added May 17, 2018)

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