September 9, 2021

Associate Professor Alberto Salvo (NUS Department of Economics), Associate Professor Liu Haoming (NUS Department of Economics), and Associate Professor Eric Fesselmeyer (Monmouth University Department of Economics, Finance and Real Estate) were recently featured in an interview in NUS News titled ‘NUS study estimates low long-run discount rates using Singapore condominium’. They discussed their recently published journal article ‘Declining Discount Rates in Singapore’s Market for Privately Developed Apartments’ (Journal of Applied Econometrics, 2021), which focused on the reasons for and implications of  declining discount rates for Singapore condominium sales from 1995 to 2015.

Using statistical models that compared the price paid for properties of different lease lengths, the team estimated that discount rates start at about 2.5 to 4 percent per year for the first 100 years, and fall to 0.5 to 1.5 percent per year by the 400^th year. This would explain why freehold properties tend to sell for 15 to 20 percent more than 99 year leasehold properties and 3 to 5 percent more than 999 year leasehold properties. The declining discount rates would also imply greater value for public investments made today, which provide returns to society many years in the future.

A/P Salvo mentioned that long-run market discount rates are essential for climate change policy analysis as well as evaluating other long-run investments such as the building of new MRT lines. These investments, like the condominiums  the study examined, typically cost a lot initially but provide benefits for many years.

A/P Fesselmeyer found that from their property purchases, many of Singapore’s residential property buyers displayed traits of patience and were forward-looking in how they were willing to pay a premium for the peace of mind of owning a long-run asset.

The researchers also noted that the discount rates they found from the study were significantly lower than the rates used to evaluate public policy. The current policy of using a constant discount rate rather than a declining one would mean that benefits which would only show up in the long run, such as slowing climate change or investing in long-term infrastructure, could be incorrectly undervalued when conducting cost-benefit analysis.

As declining discount rates imply higher carbon prices, the researchers suggested that governments should raise carbon prices substantially  to benefit future generations.

Read ‘NUS study estimates low long-run discount rates using Singapore condominium’ here.

Read ‘Declining Discount Rates in Singapore’s Market for Privately Developed Apartments’ here.