Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/141621
Authors: 
Fesselmeyer, Eric
Liu, Haoming
Salvo, Alberto
Year of Publication: 
2016
Series/Report no.: 
IZA Discussion Papers 9862
Abstract: 
We examine Singapore's fairly homogeneous private-housing market and show that new apartments on historical multi-century leases trade at a non-zero discount relative to property owned in perpetuity. Descriptive regressions indicate that new apartments with 825 to 986 years of tenure remaining are priced 4 to 6% below new apartments under perpetual ownership contracts that are otherwise comparable. We consider an empirical model in which asset value is decomposed into the utility of housing services and a second factor that shifts with asset tenure and the discount rate schedule. Exploiting the supply of new property with tenure ranging from multiple decades to multiple centuries, we estimate the discount rate schedule, restricting it to vary smoothly over time through alternative parametric forms. Across different specifications and subsamples, we estimate discount rates that decline over time and, accounting for the observed price differences, are of the order of 0.5% p.a. by year 400-500. The finding that households making sizable transactions do not entirely discount benefits accruing many centuries from today is new to the empirical literature on discounting and, with the appropriate risk adjustment, of relevance to evaluating climate-change investments.
Subjects: 
discounting
social discount rate
declining discount rates
asset pricing
cost-benefit analysis
policy evaluation
long time horizon
climate change
real estate
JEL: 
D61
G12
H43
Q51
Q54
R32
Document Type: 
Working Paper

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