The pricing of first-hand real estate: empirical investigation

Abstract

Empirical research in real estate generally does not, or needs not, distinguish between first and second-hand markets because transactions are generally made between individual buyers and sellers. The Hong Kong apartment units market is different – its first-hand market is dominated by a small number of sellers (developers). Through examining the pricing of first-hand units relative to second-hand units, this study critically tests the theory of market power against the theory of demand uncertainty. We find that, contrary to anecdotal evidence, first-hand units are consistently sold at a discount, and the discount is slightly bigger for developers with high market share. This, along with other tests based on holding cost, rejects market power in favor of demand uncertainty. This study further examines the substitution between first and second-hand units. We find that developers face competition not just from substitutes from other developments but also face some self-competition from within their own development.