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Term structure of discount rate: evidence from UK repeat-sales housing

Author

Listed:
  • Hang Lai
  • Stanimira Milcheva

Abstract

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 from 1.2% to 1.8%, suggesting the consideration of the regional difference in policy design and investment.

Suggested Citation

  • Hang Lai & Stanimira Milcheva, 2023. "Term structure of discount rate: evidence from UK repeat-sales housing," ERES eres2023_30, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2023_30
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    More about this item

    Keywords

    Asset Pricing; Declining Discount Rates; housing; Repeat Sales Model;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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