Long-Run Discounting: Evidence from the UK Leasehold Valuation Tribunal

Abstract

The United Kingdom's Leasehold Valuation Tribunal hears extension and enfranchisement cases between landlords (freeholders) and tenants (leaseholders). In these cases, the two parties argue about the terms of housing lease extensions of up to 90 years in length, and about enfranchisements to convert leasehold contracts of specific durations to perpetual ownership freeholds. The widely-followed decisions of the leasehold valuation tribunal provide a unique insight into household-level variation in expectations of long-run discount rates and cash-flows, and set bounds on the prices that market participants may be willing to pay for housing over long periods of time. We use the record of decisions since 1995 to extract information about long-run cash-flow and discount rate expectations in this unique setting, which requires no estimation, but has real stakes for the participants in these negotiations. We find evidence that the discount rate associated with these decisions causes values of properties discounted for long periods (above 90 years) to be close to zero.

Keywords: long-run discount rates, climate change, real estate, asset pricing

JEL Classification: G11, G12, Q20