Declining Discount Rates in Singapore's Market for Privately Developed Apartments

Journal of Applied Econometrics

62 Pages Posted: 26 Mar 2016 Last revised: 2 Jul 2021

See all articles by Eric Fesselmeyer

Eric Fesselmeyer

Monmouth University

Haoming Liu

National University of Singapore (NUS) - Department of Economics

Alberto Salvo

National University of Singapore (NUS) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 20, 2020

Abstract

We examine Singapore's market for new privately developed apartments, which for historical reasons exhibits wide quasi-experimental variation in ownership tenure, ranging from perpetual to multi-century to multi-decade leases. We develop an empirical model in which transaction prices are decomposed into the utility of housing services and a second factor that shifts with asset tenure and the discount rate schedule. We implement the model using nonlinear least squares to directly estimate the discount rate schedule, disciplining it to vary smoothly over time through alternative parametric forms or a trend acceleration penalty. Across different specifications, we estimate discount rates that decline over time and, to accommodate the observed price differences, fall to 0.5-1.5% p.a. by year 400. The finding that households making sizable transactions do not entirely discount benefits that will accrue centuries from today contributes to the empirical literature on discounting and is relevant, with the appropriate risk adjustment, for evaluating climate-change investments.

Keywords: Discounting, social discount rate, declining discount rates, cost-benefit analysis, policy evaluation, long time horizon, climate change, real estate, jackknife estimates, HP filter

JEL Classification: D61, H43, Q51, R32

Suggested Citation

Fesselmeyer, Eric and Liu, Haoming and Salvo, Alberto, Declining Discount Rates in Singapore's Market for Privately Developed Apartments (October 20, 2020). Journal of Applied Econometrics, Available at SSRN: https://ssrn.com/abstract=2754429 or http://dx.doi.org/10.2139/ssrn.2754429

Eric Fesselmeyer (Contact Author)

Monmouth University ( email )

Haoming Liu

National University of Singapore (NUS) - Department of Economics ( email )

10 Kent Ridge Crest
Singapore 119260
Singapore

Alberto Salvo

National University of Singapore (NUS) - Department of Economics ( email )

1 Arts Link, AS2 #06-02
Singapore 117570, Singapore 119077
Singapore

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