Property Rights and Land Value: The Impacts of Political Instability

Abstract

Motivated by the valuation of a leasehold property in relative to a comparable freehold property under different land lease policy scenarios, this paper attempts to offer an explanation to the premium fetched by a freehold property as well as an explanation to the variations of the premium across jurisdictions. The conceptual framework justifies the causes of and the policy impacts on freehold premiums. The empirical analyses are based on the transaction data drawn from both Singapore and Hong Kong private residential housing markets where two different but comparable land lease structures and land lease policies are in force. The results estimate the freehold premiums and illustrate their variations which support our arguments that a larger bundle of property rights associated with a freehold reduces the housing investment risks for a freehold owner in relative to a leasehold owner. A buyer therefore likes to pay more for a freehold, initiating the freehold premium. Any government land lease or related policies that are unfavorable to a leasehold owner may increase the housing investment risks for a leasehold owner, which may reduce the value of option to redevelop a leasehold property, leading to a higher freehold premium.