Abstract
This study examined whether the real option is implemented in the housing supply market where houses are available for sale at the time of construction. The Cox Proportional Hazard Model was used to investigate whether real options are implemented between permits and commencements and subsequently between commencements and completions after deriving the uncertainty variable of the housing market through a GARCH model. The study found that builders alter their exercise rate of permits with the latest information on housing-market conditions. The empirical analysis supports what theoretical literature and previous studies have concluded, that real options are essential in justifying irreversible investments such as housing supply. In particular, the time of starts was observed to be a crucial time in investment decision-making in a market where large-scale houses are sold in advance before construction. The results of this study imply that it is necessary for policy responses to minimize the uncertainty of the housing market such that housing builders can provide stable housing.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have