Accounting and Apartment Prices - Evidence from the Swedish housing market

Abstract: Prices in the Swedish housing market have developed considerably faster than Swedish GDP in recent years, resulting in increased leverage among apartment buyers and a higher financial risk in the Swedish economy. Furthermore, from the financial reporting year starting in 2014, Swedish non-listed entities were mandatorily required to adopt one of the K-frameworks. Using a sample of the 100 largest tenant-owner associations (TOAs) in Sweden adopting the K3-framework, we analyze (1) the potential effects on financial reporting quality and financial reporting harmonization following the implementation of the K3-framework and (2) how the financial performance and position of TOAs are reflected in the pricing of tenant-owned apartments. We find that general voluntary disclosure has increased following K3 adoption. Furthermore, we find that the disclosure related to TOAs' depreciation of parts method decreased at the time of K3 adoption, while the harmonization related to depreciation of parts increased over time. We conclude that financial reporting quality and harmonization has improved following K3 adoption. Looking at the valuation of tenant-owned apartments, we find that apartment-buyers are not using unfiltered information to a full extent. Our results suggest that financial performance has a statistically significant, but low, impact while TOAs' net debt is not fully reflected in apartment prices.