City Research Online

Abstract

The government is proposing to make it cheaper for leaseholders to renew their lease or purchase the freehold by reducing the premium that they must pay. We analyse the financial implications of proposals to change the extended lease length and eliminate the marriage value payment by considering the aggregate impact on the market and the distribution of windfall financial gains among different types of leaseholders. We outline the channels explicitly. Our methods comprise of hedonic apartment price models to validate price discounts and an option pricing model to derive the estimated impact on leasehold prices. We find that a premium reduction will be capitalised into short leasehold prices in the short run, implying that leaseholders do not have to extend their lease to realise a financial gain. The premium capitalisation and the greater financial incentive to extend short leases will increase leasehold values and have an aggregate effect on market prices in the short and long-run respectively. Investor rather than homeowner leaseholders stand to be the main beneficiaries from this set of reforms. But the impact on the market and its distributional consequences will vary depending on the region. We conclude that these reforms have unintended consequences for housing affordability and levelling up.

Publication Type:	Monograph (Working Paper)
Publisher Keywords:	leasehold reform, capitalised premium, housing affordability, levelling up
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School Bayes Business School > Finance
SWORD Depositor:	Symplectic Administrator

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