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NATIONAL BUREAU OF ECONOMIC RESEARCH
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Valuation of Long-Term Property Rights under Political Uncertainty

Zhiguo He, Maggie Rong Hu, Zhenping Wang, Vincent Yao

NBER Working Paper No. 27665
Issued in August 2020, Revised in August 2020
NBER Program(s):Asset Pricing, Corporate Finance, Development Economics, Law and Economics, Political Economy

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.

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Document Object Identifier (DOI): 10.3386/w27665

 
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