It is not easy being a flipper : understanding housing speculation from regulator and investor perspectives

Abstract

This thesis examines housing speculation from both regulator and investor perspectives. From the regulator side, we investigate how anti-speculation policies targeting certain real estate submarkets trigger short-term speculators (flippers) to enter non-target submarkets and the impacts of such cross-market spillovers on market price and volatility. After the anti-speculation policy that only targeted the presale residential property market took effect in 1994, flippers flowed into the spot residential property market, causing the share of flipping transactions in the spot residential property market to increase by 31.3% in 2 years. This spillover significantly reduces the price volatility in the spot residential property market by 12.83%, but its impact on price growth is small, implying the price stabilizing effect of flippers. We also examine another anti-speculation policy concerning the entire residential property market in 2010. We find no strong evidence that the cross-market spillover continued in non-residential property markets.

From investor side, we document that the excess capital gain returns of short-term flippers are obtained at the cost of bearing high idiosyncratic risk. We find that although flippers obtained higher annualized returns than long-term buyers, the Sharpe ratio of flippers is lower than that of long-term buyers. A similar pattern is observed in the appraisal ratios of home investors in Hong Kong. Only experienced flippers, who have at least 2 prior trading experiences and constitute less than 20% of the flippers, outperform long-term buyers in terms of risk-adjusted returns. Furthermore, this thesis presents new empirical evidence suggesting that information quality and market liquidity can explain the term structure of idiosyncratic risk.

This thesis emphasizes the importance of considering cross-market spillovers in regulating short-term speculations in real estate markets. Additionally, it provides new insights of discouraging flipping speculations from the perspective of making rational investment decisions.