Download this Paper Open PDF in Browser

How Do Households Discount Over Centuries? Evidence from Singapore's Private Housing Market

63 Pages Posted: 11 Apr 2016  

Eric Fesselmeyer

National University of Singapore (NUS) - Department of Economics

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

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.

Keywords: discounting, social discount rate, declining discount rates, asset pricing, cost-benefit analysis, policy evaluation, long time horizon, climate change, real estate

JEL Classification: D61, G12, H43, Q51, Q54, R32

Suggested Citation

Fesselmeyer, Eric and Liu, Haoming and Salvo, Alberto, How Do Households Discount Over Centuries? Evidence from Singapore's Private Housing Market. IZA Discussion Paper No. 9862. Available at SSRN: https://ssrn.com/abstract=2761339

Eric Fesselmeyer (Contact Author)

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

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

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

Paper statistics

Downloads
11
Abstract Views
192