IS LAND LEASING A SOLUTION TO UNAFFORDABLE HOUSING?

Abstract

The increase in U.S. mortgage rates from nine per cent in 1976 to fifteen per cent in 1982 raised monthly mortgage payments by about sixty per cent, even before rising house prices in the United States over this period are taken into account. Not surprisingly, attention has been focused on ways and means of counteracting spiralling housing costs. One proposed solution is land leasing. Under such an arrangement, the homebuyer purchases the house but leases the land. (There may be an option to buy the land at some time in the future.) Land leasing reduces the overall purchase price, and hence lowers the minimum down‐payment and the initial monthly mortgage payment. In Hawaii, land leasing has been a readily available alternative to land owning throughout the postwar period. The analysis of residential housing prices in Hawaii provides some quantitative estimates of the relative prices of leasehold versus fee simple properties. The average price differential is surprisingly small. One explanation of these small price differentials, for which a model is developed and tested here, is that borrowing‐constrained households use high discount rates to calculate the present value of the future land price that they will, in effect, have to pay at the expiration of the lease. These discount rates are estimated in a nonlinear hedonic property price equation. The results are then employed to answer the question: Under what conditions would a leaseholder buy the land outright before the expiration of the lease?