Wednesday, October 21, 2020

"How much does political uncertainty in Hong Kong affect property valuations?"

From the University of Chicago's Booth School of Business, October 16:

Investors widely believe that political and social unrest, including the threat of revolution, drive down asset values. Because so many interrelated economic and social factors are always at play, isolating the influence of political uncertainty on asset prices can be difficult. 

Hong Kong, however, provides a laboratory for doing so. Chicago Booth’s Zhiguo He, Booth postdoctoral scholar Zhenping Wang, University of Hong Kong’s Maggie Hu, and Georgia State University’s Vincent Yao, by comparing property valuations before and after the political authority is set to change in 2047, find that rising uncertainty in Hong Kong has significantly lowered property values.

Uncertainty is a feature of life in Hong Kong now because, as the researchers explain, the region, “caught in the middle of the conflict between China and the western world, has become a political battleground for the fate of the unprecedented political experiment ‘One Country, Two Systems,’ especially since its ongoing 2019– 20 social unrest.” In 1997, the United Kingdom transferred the former colony back to China, and both governments agreed to temporarily make Hong Kong a special administrative region that would maintain a capitalist system. That agreement expires in 2047, when the Hong Kong Special Administrative Region (HKSAR) will cease to exist, and Beijing will have authority.

The researchers seized upon this hard transition date to calculate the effects of political uncertainty on long-term asset values, namely land leases, which lend themselves in this case to a natural experiment. In Hong Kong, land tenure is granted by the government for a fixed term. Leases can be renewed and extended when their terms end, and while an extension is subject to potential additional charges, those are typically low.  

What’s more, the leases that have been granted by one government, say the British colonial government or the HKSAR, can be renewed by another, such as the government that takes over in 2047. This exposes many lessees to substantial political risk—namely, will current leases that expire after 2047 be extended with little cost, as has been the case? 

He, Hu, Wang, and Yao tracked housing values from January 1992 through February 2020, a period of increasing political tensions. Using public census and sales data from Hong Kong, the researchers built a model for property values on the basis of the 2047 transition date and created two measures of uncertainty sentiment. In Hong Kong, the colonial government owned all of the land, leasing out the rights to use it under long-term contracts, a practice that the special administrative region continued. The researchers used land leases that expire before 2047 as a control group and measured whether those properties traded at a premium compared with real estate that had later expirations....