Term structure of discount rate: evidence from UK repeat-sales housing
37 Pages Posted: 14 Dec 2021 Last revised: 1 Dec 2022
Date Written: November 30, 2022
We infer the term structure of discount rates through the implication of relative price discounts between short leaseholds and very long-term leaseholds in UK repeat-sales housing markets. The price discount reflects the cash flows starting at the short leasehold expiration and is informative about the implied discount rates that households use in their payment valuation. For our empirical analysis, we use repeat-sales regression on properties transacted more than once to deal with the omitted variable and selection bias issues that the hedonic model might have. We find that the term structure of discount rates has a downward-sloping shape over a long horizon with a low implied gross discount rate of 1.3% at 100 years. In addition, we find households living in poor and rich areas or London and Non-London areas apply low but different discount rates, suggesting the consideration of the regional difference in policy design and investment.
Keywords: Declining Discount Rates, Hedonic Model, Repeat Sales Model, Housing, Asset Pricing.
JEL Classification: G11, H31, R30
Suggested Citation: Suggested Citation