Valuation of Long-Term Property Rights under Political Uncertainty

Zhiguo He (), Maggie Hu (), Zhenping Wang () and Vincent Yao
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Maggie Hu: Chinese University of Hong Kong - School of Hotel and Tourism Management
Zhenping Wang: University of Chicago - Booth School of Business

No 2020-105, Working Papers from Becker Friedman Institute for Research In Economics

Abstract: We empirically analyze pricing of political uncertainty in long-term property rights, guided by a theoretical model of housing assets subject to contract extension in the remote future. To identify exposure to political uncertainty, we exploit a unique variation around land lease extension protection beyond 2047 in Hong Kong's housing market due to the historical arrangements under the "One Country, Two Systems" design. Relative to properties that have been promised an extension protection, those with legally unprotected leases granted by the current Hong Kong government are sold at a substantial discount of around 8%. Similar contracts issued during the colonial era suffer an additional discount of about 8% due to their reneging risk. Our parsimonious model matches well the estimated discounts across long-term lease horizons, and implies that to extend their leases homeowners expect about 25% of penalty on ground rent after 2047. The discount is higher when people's confidence declines and where residents feel more uncertain of the city's future.

Keywords: Long-term contracting; commitment; housing; land lease; asset pricing; reneging risk (search for similar items in EconPapers)
JEL-codes: G11 G12 G18 R30 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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