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

23 Pages Posted: 23 Mar 2014 Last revised: 18 Feb 2017

Cristian Badarinza

National University of Singapore (NUS)

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR)

Date Written: October 1, 2015

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

Suggested Citation

Badarinza, Cristian and Ramadorai, Tarun, Long-Run Discounting: Evidence from the UK Leasehold Valuation Tribunal (October 1, 2015). Saïd Business School WP 2014-4. Available at SSRN: https://ssrn.com/abstract=2412296 or http://dx.doi.org/10.2139/ssrn.2412296

Cristian Badarinza

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Tarun Ramadorai (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

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

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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