Name: Chikumbe Sankwa
ID: 615903
12. Why might we be interested in long-run discount rates?
 Because of uncertainty, people would prefer to receive a gift now,
instead of the same one in 14 years’ time.
 Economists refer to this notion by speaking of "discount rates", the
rate at which future costs and benefits are adjusted to make them
comparable with those today.
 Mostly, economists worry about discount rates over a few years, or
perhaps decades. But how do you calculate them over hundreds of
years?
 This poses a challenge hence, the need to know how long-run
discount rates need to be determined.
 Using the wrong discount rates, in other words, creates all sorts of
problems.
 There is need to know the long- term impact of economic activities
by thinking ahead into the future.
 Policymakers may posit that; A lower discount rate implies that big
investment projects over many decades may make more economic
sense than is usually perceived.
 Governments, in other words, may be systematically
underinvesting.
13. What is the difference between leaseholds (LH) and freeholds (FH) that causes their price difference?
• LH have temporary ownership for varying tenure
• FH have permanent ownership
• Estimate the difference in price • Value of a leasehold increases with its maturity
• LH trade at larger discounts to freeholds
• 80-­‐100 years discount from 10-­‐15%
• 125-­‐150 years discount 5-­‐8%
• LH with over 700 years of maturity trade same price as FH
• Price difference reflects present value of perpetual rental income starting at leaseholds • Price difference suggest that households apply annual consumption discount rates of 2,6% in 100 years in the future Marita Koskinen
Qn 3. Hedonic Regression
Abhinav Sigdyal -k93722
• What?
• An estimation technique to approximate value of a heterogenous asset with multiple
constituent characteristics.
• Eg: Asset = A Building and its Characteristics =It’s Location, Number of Rooms, Sizes,
etc.
• How?
• Decompose the item into characteristics, treat each of these attributes seperately and
estimate price for each of these attributes.
• Why?
• To control for possible heterogeneity in estimating the value of goods such as real estate.
• In reference to this paper, hedonic regression allows to consider the variation in price
over time and across lease terms for different properties while controlling for key
characteristics of each property.
• Applications in Real Estate and Consumer Price Index calculations
4. What is the main results from the hedonic
regressions?
Results:
• Leaseholds with a maturity of 100 years are valued 10-15% less than freeholds.
• Leaseholds with a maturities of 125-150 years are valued 5-8% less than
freeholds.
• Leaseholds with maturity of 700+ years are valued the same than freeholds.
Interpretation:
• In valuation, there is a suprisingly big weight on cash flows that occur over 100
years in the future. In fact, at least 10% of the value.
• The very long term discount rate is low, only 2,6%.
Joonas Pohja
How confident you are in the result and why?
• I’m very confident in the results
• Results are consistent in Singapore and London. Two cities where housing
markets face very different institutional settings
• The authors manage to identify and control for myriad of possible
problems in their paper
• They have anticipated for multiple different possible sources of unobserved
heterogeneity and provide either direct evidence that the leasehold
discounts are not affected by them or at least it’s improbable
• Results are robust to various different specifications. (Inclusion of controls,
exclusion of London, some restrictions)
Niko Teromaa
11.Could the findings be explained by some
unobserved differences between FHandLH?
There may be many unobserved differences between the two:
• There may exist some structural heterogeneity between the two that isunobserved
• However,authors find that with good controls chance ofOVisrather small
• Perceived contract structure or covenants onthe buyers’part may affect the results
• The clientele between the groups may be different (buyers were not observed perauthors)
• LHandFHproperties could differ intheir liquidity inthe resale markets,showcasing a
liquidity discount (the discount islarger if lease length increases)
• The two types may suffer from different levels offinancing frictions (e.g.lower upfront
payments inleaseholds)
• Properties ofdifferent types can be affected by taxation (shorter properties would incur
lower tax bracket over time)
• Hold-up problems can also be prevalent:freeholder might charge higher premiums and
admin.expenses inexchange forextra years onthe lease
Teemu Riipi 289180
7. How does the price discount of LH (leaseholds ) compared to FH
(freeholds) relate to the rate that people discount the future and the rate
of growth of rents?–Joonas Mussalo
A simple model to calculate the value of the property:
1. Freehold
𝐷
𝑅𝑒𝑛𝑡𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒
𝑃=
=
𝑟 − 𝑔 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒 − 𝑟𝑒𝑛𝑡𝑎𝑙 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒
2. Leasehold
𝐷
𝑃=
1 − 𝑒 − 𝑟−𝑔
𝑟−𝑔
𝑇
Thus the price discount between FH and LH is
𝑃𝑇
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 ≡
− 1 = −𝑒 − 𝑟−𝑔
𝑃
𝑇
The value of the apartment depends on
1) Rental income 2) Discount rate 3) Rental growth rate 4) (Lease length)
As a result:
- The smaller (larger) the discount rate  Larger (smaller) price discount between LH and
FH
- The smaller (larger) the rental growth rate  Larger (smaller) price discount rate between
LH and FH
8. Risk premium and its effect on discount rate
Ø Discount rate consists of two components:
r = r f + r RP
Ø Risk free component corresponds the yield of
hypothetical very long-run real zero-coupon bond
Ø Risk premium is a compensation for the investor for
taking extra risk when investing to a risky asset rather
than to the risk-free bond
Ø Giglio et al.:
r = 1% +1.6% = 2.6%
JussiJarvi&RistoHurmeranta
9. If the long-run discount factor is below 2.6% (instead of say 5%) what policy
implications does it have?
●
●
●
●
●
Long-run discount rates are important in macroeconomics and fiscal policy applications when conducting costbenefit analyses to consider effects that materialize over very long horizons.
Estimates on how households discount payments over very long horizons have not been available, because
necessary finite long-maturity assets are not available.
U.S. Office of Management and Budget (2003) recommends a wide range of discount rates (1–7%), lamenting
that while ‘‘private markets provide a reliable reference for determining how society values time within a
generation, for extremely long time periods no comparable private rates exist.’’
Gigglio et al. provide direct estimates of households’ discount rates for payments very far in the future.
The policy implications of smaller long-run discount factor (below 2.6% instead of say 5%) are that the net present
value of the cash flow (i.e. effect of policy) is smaller.
– Over 100 horizon the value of an annuity with discount rate of 2,6% is ~92% higher than with 5,0% discount
rate.
– A single cash flow 100 in to the future at 5,0% discount rate has only 9,9% of the value of 2,6% discount rate
31E12100 - Microeconomics: Policy,
Reading assignment for Dec 01
Questions 8 & 9
Tuomas Noopila
42335D
10. What is the relevance of long-term discount rates
on climate policy?
■ Cost-benefit-analysis
– Environmental investments cost now but benefits occure in the distant future
– What is the ROI for a clean technology?
– Based on Giglio et al. (2015), we place more value to future benefits than previously
thought
■ Future benefits discounted with a small rate  greater present value
– Argument for environmental policy
– Less investments with larger discount rate
■ Remaining issues:
– Monetization of benefits
– Uncertainty of benefits compared to housing
Saara Kuhalainen