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American Economic Review Vol. 114 No. 9 2024

Valuing Long-Term Property Rights with Anticipated Political Regime Shifts

Zhiguo He1; Maggie Hu2; Zhenping Wang3; Vincent Yao4

1 Stanford University, Graduate School of Business, and NBER (email: ) · 2 Department of Real Estate, Baruch College, City University of New York (email: ) · 3 PGIM Quantitative Solutions (email: ) · 4 J. Mack Robinson College of Business, Georgia State University (email: )

Abstract

We identify exposure to political risk by exploiting a unique variation around land lease extension protection after 2047 in Hong Kong’s housing market due to historical arrangements. Relative to properties that have been promised an extension protection, those with unprotected leases granted by the current government are sold at a discount of 8 percent; those with colonial leases suffer an additional discount of 8 percent. Incorporating estimated structural parameters that suggest an additional 20 percent ground rent after 2047, our model matches empirical discounts well across lease horizons. Discounts increase over time, particularly in areas with greater pessimism about the city’s future.

DOI
10.1257/aer.20211242
Volume
114
Issue
9
Pages
2701-2747
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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