Legal characteristics and their impact on the prices of dwellings in the Prime Central London Market: A Hedonic Analysis

In the UK there exist transactions involving residential properties, particularly apartments, where there is a clear distinction between the user rights of the dwelling and the ownership of the land in which the dwelling stands on. The majority of current hedonic analyses of dwelling prices focus on the impacts of its physical and locational characteristics. A few of these studies control for this distinction crudely by broadly categorising dwellings into freeholds and leaseholds. However, the length of an unexpired lease may have substantially varying impacts on dwelling prices, and consequently adopting such a crude indicator could lead to misleading predictions of value and biased estimates of value attributable to certain physical and locational characteristics. Our hedonic investigation examines the role played by the length of unexpired leases on prices of dwellings in Prime Central London. Empirical propositions tested include the effect of having a pure leasehold and a share of the freehold on dwelling prices, as well as the threshold and non-linear effects of the length of an unexpired lease. Our main conclusion is that it is important to control for lease expiry.