Overview of the Working Paper
The National Bureau of Economic Research (NBER) working paper 33470, titled “An Alpha in Affordable Housing?”, is authored by Sven Damen, Matthijs Korevaar and Stijn Van Nieuwerburgh. The authors are affiliated with the University of Antwerp, Erasmus University Rotterdam and Columbia University respectively. Their research investigates the returns and risks associated with low‑rent residential properties across the United States, Belgium and the Netherlands, using detailed administrative rent, cost and price data.
Core Findings on Rental Returns
Across all three countries, low‑rent units consistently generate higher gross and net rental yields than high‑rent units. In Belgium, the gross yield gap between the first and tenth deciles of the rent distribution is 2.13 percentage points; in the Netherlands it is 2.67 percentage points; and in the United States the net yield gap is about 0.61 percentage points. When capital‑gain yields are added, total annual returns for low‑rent properties exceed those for high‑rent properties by 1.74 percentage points (Belgium), 3.60 percentage points (Netherlands) and 3.86 percentage points (United States).
Risk‑Based Explanations Examined
The paper tests three conventional risk hypotheses.
- Systematic risk – Low‑rent properties display lower beta with the business cycle, acting as a recession hedge rather than a risk premium.
- Regulatory risk – State‑level tenant‑protection scores, economic‑policy uncertainty and political control show no positive correlation with higher returns for low‑rent units; in some cases the relationship is opposite.
- Idiosyncratic risk – Mortgage delinquency rates and cash‑flow volatility are not markedly higher for low‑rent properties; volatility differences are modest and cannot justify the observed return gaps.
Cost Structure and Its Impact
Detailed cost breakdowns reveal that low‑rent properties bear higher cost ratios. In Belgium, maintenance costs account for 1.59 percentage points of the gross yield gap; property taxes add 0.49 percentage points; turnover, default and management costs together contribute another ~0.7 percentage points. In the Netherlands, maintenance costs (1.45 percentage points) and higher property‑tax rates similarly erode part of the gross yield advantage, yet a net yield advantage of roughly 1.10 percentage points remains.
Investor Segmentation and Market Frictions
The study identifies distinct landlord types. Medium‑size personal investors dominate the low‑rent segment, while very large corporate landlords concentrate in high‑rent markets, citing reputational concerns and potential diseconomies of scale. Large institutional investors possess the capital to arbitrage away the excess returns but are deterred by public‑scrutiny and stakeholder expectations. Medium‑size landlords lack external equity financing and face local‑bias constraints, limiting their ability to scale up. Low‑income renters also lack the financial resources to purchase the properties they occupy, reinforcing the persistence of the return differential.
Policy Implications for Sustainable Housing
The authors suggest three policy avenues to reduce the return gap and improve affordable‑housing outcomes:
- Channel institutional capital – incentives such as tax credits, mortgage guarantees or dedicated affordable‑housing funds could attract large investors to low‑tier rentals.
- Support medium‑size landlords – improving access to equity financing and reducing local‑bias through information platforms may enable these investors to expand sustainably.
- Facilitate renter ownership – shared‑equity schemes or first‑time‑buyer credits targeted at low‑rent tenants could help convert renters into owners without inflating market prices. Overall, the paper provides robust cross‑country evidence that low‑rent residential housing yields a persistent positive alpha, driven not by higher risk but by market frictions and limited capital flow. Addressing these frictions could enhance the supply of sustainable, affordable housing throughout Europe.