Environmental Valuation & Cost-Benefit News
Intergenerational discounting: A case from Hong Kong
05/15/08
10:04:54 pm, by damageva 
, 292 words, 195 views 
Categories: General, Real Estate Construction Housing, Academic Study/Journal Article, Preservation & Open Space, Endangered Species, China, Hedonic Analysis, Environmental Economics / Ecological Economics, Costs and Benefits
Intergenerational discounting: A case from Hong Kong
Abstract: In debating sustainable development issues such as climate changes and nuclear waste disposal, policymakers usually base their decisions on cost-and-benefit analysis (CBA), which evaluates tradeoffs between costs and benefits spanning over a century. Fundamental to this approach is the choice of an intergenerational discount rate for a society. Observable market rates, however, are mostly available up to 30 years only (e.g. US bonds), which do not necessarily reflect the long-term discount rate for a society to deal with sustainable development. A number of studies have demonstrated that a small change in the discount rate can drastically alter the CBA's outcome. This paper seeks to unveil the market's intergenerational discount rate by analyzing a very “long-lived” and inheritable asset—land property. By examining a mix of lease tenures (50, 75, 99, and 999 years) and their transactions, we found that 999-year property commands a significant premium of 5.74% over 99-year property from 1992 through 2006. The premium implies an intergenerational discount rate of 4.31% p.a. on average, which is significantly lower than the intragenerational discount rate. The discount rate so unveiled would contribute to a more informed intergenerational decision analysis, such as evaluating the cost-effectiveness of environmental legislation and assessing very long-term pollution damages in court. The result also has important implications for real estate valuation practices in China, as all land in Mainland China and Hong Kong is leasehold.
Keywords: Sustainable development; Discount rate; Land value; Land tenure
Article Outline
by S.K. Wong 1, K.W. Chau 1, C.Y. Yiu 1 and M.K.W. Yu 2
1. Department of Real Estate and Construction, The University of Hong Kong, Hong Kong
2. The Bartlett School of Graduate Studies, University College London, UK
Habitat International via Elsevier Science Direct www.ScienceDirect.com
Volume 32, Issue 3; September, 2008; Pages 283-292
http://dx.doi.org/10.1016/j.habitatint.2007.08.015
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