The Time Value of Housing: Historical Evidence on Discount Rates

Abstract

Most London housing transactions involve trading long leases of varying lengths. We exploit this to estimate the time value of housing — the relationship between the price of a property and the term of ownership — over a hundred years and derive implied discount rates. For our empirical analysis, we compile a unique historical data set (1987 to 1992) to abstract from the right to extend leases currently enjoyed by tenants. Across a variety of specifications and samples we find that leasehold prices are consistent with a time declining schedule and low long-term discount rates in housing markets.

Keywords: Housing, leasehold, discount rates

JEL Classification: G10, R30