Influence of Speculation on the Price of Converted Condominium Units

PAD-81-62: Published: Mar 5, 1981. Publicly Released: Mar 5, 1981.

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Congressional concern was expressed that the rapid turnover in sales of converted condominium units by investors has caused the price of these units to increase more rapidly than general housing prices. In response, GAO reviewed the complex interactions that determine the prices at which transactions take place in the housing market.

The price of a converted condominium cannot be assessed in isolation from the prices of other converted condominiums or the prices and rentals of alternative housing units. Generally, prices for housing depend on three broad sets of factors: (1) the demand of housing of all types; (2) the supply of housing of all types; and (3) the debt service burden associated with the purchase of most housing which is dependent largely on mortgage interest rates. Any buyer of a converted condominium unit weighs several factors when purchasing the unit. First, given his tastes, he compares the purchase price of that unit with the purchase prices on alternative units that suit his needs. Second, in view of mortgage market conditions, he must decide whether the downpayment and monthly debt service burden imposed on him is affordable. The supply and demand of converted condominium units depends on the costs of conversion, the costs of development of alternative housing units, and a myriad of factors influencing the availability of resale property. Logically, developers would only convert rental units into condominiums if the expected rate of return exceeds the rate of return from construction of new condominium units or other types of housing. The interaction of demand, supply, and mortgage markets limits the prices obtainable from the sale of converted condominiums.

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