The transaction price patterns of first-hand residential developments in Hong Kong

Abstract

Compared to selling residential properties in second-hand markets, a special feature of first-hand sales is that instead of selling a single property, sellers (i.e., developers) sell multiple properties of a residential development. In order to maximize overall profit, what are the strategies adopted in the sales of residential developments? By examining the transaction price patterns, this thesis aims to reveal the strategies of developers in the sales of first-hand residential developments in Hong Kong.

This thesis comprises two parts. Part I focuses on the “augmented products” of first-hand residential properties: in Hong Kong, it is common for developers to provide buyers with a bundle of sales services beyond the property itself (e.g., complimentary products, the option of seller financing). While they are often framed as promotional benefits, have they actually been charged as part of the purchase price? As the first attempt to study the augmented products of first-hand properties, this thesis uses the transaction data of 36,635 first-hand properties in Hong Kong and shows that augmented products are not free but could constitute 5.2%-22% of transaction prices.

Part I further examines the pricing strategies of developers in the presence of long-term seller financing. For most households in Hong Kong, homeownership has been hard to achieve without any financial assistance. As bank credit is constrained, seller financing from developers serves as a popular alternative for buyers to reduce the amount of down payment. It is found that developers have used second mortgages to price-discriminate buyers – the premium charged for using the second mortgages from developers is 4.9%. Moreover, tightening credit supply can give developers a stronger market power to extract profits from buyers with severe financial problems. Apart from price discrimination, the study also shows that the offer of seller financing can mitigate information asymmetry about product quality.

In the sales of residential developments, properties are sold sequentially. In Part II, a pioneer study is conducted to explain the patterns of transaction price in sequential sales. First, by comparing the patterns of transaction price with and without controlling product quality, the study reveals that in early transactions, most developers release properties in a sequence of improving quality to create an incremental price pattern. A possible reason is that some buyers, not fully aware of the quality change, may misinterpret the increasing prices as a signal of a hot market and overestimate the values of properties. Second, in a sequential sale, the early transactions could provide valuable information about market demand. Being the first empirical study on the learning behaviour of developers, this study investigates whether and how developers learn from early transactions under demand uncertainty and finds that the sequential change of price is affected by the sales speed of preceding transactions, especially under a high level of demand uncertainty.

To conclude, this thesis has three contributions: revealing non-negligible components of the transaction prices of first-hand properties, examining the impacts of government policies on first-hand housing market, and broaden the knowledge of developer’s pricing strategies in sequential sales.