Valuation of Long-Term Property Rights under Political Uncertainty

68 Pages Posted: 11 Aug 2020 Last revised: 18 Aug 2020

See all articles by Zhiguo He

Zhiguo He

University of Chicago - Finance

Maggie Hu

The Chinese University of Hong Kong

Zhenping Wang

State of Wisconsin Investment Board

Vincent Yao

Georgia State University - J. Mack Robinson College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 17, 2020

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: Political uncertainty, Housing, Land lease, Asset pricing, Reneging risk

JEL Classification: G11, G12, G18, R30

Suggested Citation

He, Zhiguo and Hu, Maggie and Wang, Zhenping and Yao, Vincent, Valuation of Long-Term Property Rights under Political Uncertainty (August 17, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-105, Available at SSRN: https://ssrn.com/abstract=3667958 or http://dx.doi.org/10.2139/ssrn.3667958

Zhiguo He (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://www.zhiguohe.com

Maggie Hu

The Chinese University of Hong Kong ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Hong Kong, N.T.
Hong Kong

HOME PAGE: http://sites.google.com/site/maggiehuresearch/research

Zhenping Wang

State of Wisconsin Investment Board ( email )

121 E Wilson St
Madison, WI 53703
United States

Vincent Yao

Georgia State University - J. Mack Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
71
Abstract Views
502
rank
381,612
PlumX Metrics