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

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.