Downward-sloping term structure of lease rates: a puzzle

Seko, Miki and Sumita, Kazuto and Yoshida, Jiro (2012): Downward-sloping term structure of lease rates: a puzzle.

Abstract

A model of the term structure of lease rates in a frictionless economy is developed and its predictions are compared with data on residential leases in Japan. The model shows that the initial lease rate for a cancellable lease must be set higher than that for a non-cancellable lease because the former rate will be repeatedly adjusted downward when the market rent decreases. More importantly, the term structure of lease rates is always upward-sloping for cancellable leases. Empirical findings show a sharp contrast with the theory. Fixed-term lease rates are often higher than open-ended long-term lease rates. Moreover, in the fixed-term lease sample, the term structure of lease rates is downward-sloping. The term structure is also heterogeneous by tenant’s income.

• Item Type: MPRA Paper
• Language: English
• Keywords: lease contracts, term structure, cancellation option, hedonic regression, residential real estate, option premium, Japan
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; L - Industrial Organization > L8 - Industry Studies: Services > L85 - Real Estate Services; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location > R31 - Housing Supply and Markets; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R2 - Household Analysis > R21 - Housing Demand

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