Housing market and capitalization of information: Case of land leases

We study how the announced future land rent increases capitalize into leasehold prices. We investigate a case, where the City of Helsinki, Finland, announced over 15-fold rent increases for the ground lease contracts on residential land that were expiring in the near future. Our empirical strategy is based on a difference-in-differences design where we compare transactions of the leasehold units with those of near-identical freehold apartments. We find that before the first rent increase episode homebuyers were inattentive to their expected long-run housing expenses, which resulted in significant overpricing of leasehold apartments relative to corresponding freehold units. The results further suggest that housing market participants react on announced contract renewals and appear to learn the importance of the ground ownership feature when they are exposed to more and more information regarding rental contract updates. Our paper provides new causal evidence on the capitalization of information on indirect and nontransparent financial flows in the long run. Our novel finding is that market participants learn the new policy regime and the market prices (only) gradually reflect the information on future financial flows. The market reaction to new information is not immediate or absent but sluggish, which is in line with a simple model of information diffusion.