Working Paper: NBER ID: w20133
Authors: Stefano Giglio; Matteo Maggiori; Johannes Stroebel
Abstract: We provide direct estimates of how agents trade off immediate costs and uncertain future benefits that occur in the very long run, 100 or more years away. We exploit a unique feature of housing markets in the U.K. and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are temporary, pre-paid, and tradable ownership contracts with maturities between 99 and 999 years, while freeholds are perpetual ownership contracts. The difference between leasehold and freehold prices reflects the present value of perpetual rental income starting at leasehold expiry, and is thus informative about very long-run discount rates. We estimate the price discounts for varying leasehold maturities compared to freeholds and extremely long-run leaseholds via hedonic regressions using proprietary datasets of the universe of transactions in each country. Agents discount very long-run cash flows at low rates, assigning high present values to cash flows hundreds of years in the future. For example, 100-year leaseholds are valued at more than 10% less than otherwise identical freeholds, implying discount rates below 2.6% for 100-year claims. Given the riskiness of rents, this suggests that both long-run risk-free discount rates and long-run risk premia are low. We show how the estimated very long-run discount rates are informative for climate change policy.
Keywords: Discount Rates; Housing Markets; Climate Change
JEL Codes: E44; G11; G12; R30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| agents discount very long-run cash flows at low rates (G19) | valuation of 100-year leaseholds being more than 10% less than otherwise identical freeholds (R33) |
| valuation of 100-year leaseholds being more than 10% less than otherwise identical freeholds (R33) | low discount rates for 100-year claims (E43) |
| leasehold maturity (R33) | property prices (R31) |
| controlling for observable property characteristics and geographical fixed effects (R20) | addressing potential confounders (C90) |