Valuing Long-Term Property Rights with Anticipated Political Regime Shifts

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 uncertainty, Housing, Land lease, Asset pricing, Reneging risk

JEL Classification: G11, G12, G18, R30