Working Paper: NBER ID: w27665
Authors: Zhiguo He; Maggie Rong Hu; Zhenping Wang; Vincent Yao
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 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 government are sold at a substantial discount of around 8%, and those with colonial leases suffer an additional discount of about 8%. Incorporating estimated structural parameters that suggest an additional 20% ground rent after 2047, our model matches these empirical discounts well across long-term lease horizons. We find that the discount increases as time approaches 2047 and is higher in areas where residents feel more pessimistic about the city's future.
Keywords: Political Risk; Property Valuation; Hong Kong; Leaseholds
JEL Codes: G11; G12; G18; K25; N25; O53; P26; R30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political regime shifts (P39) | housing prices (R31) |
| political regime shifts (P39) | property valuations (R33) |
| legally unprotected leases (K11) | housing prices (R31) |
| colonial leases (F54) | housing prices (R31) |
| expiration date approaches 2047 (J26) | housing prices (R31) |
| anticipated increase in ground rent post-2047 (R21) | property values (R33) |