Housing price dispersion in the presale market

Abstract

Sale before completion (i.e. presale) is a common practice that real estate developers use to sell residential units. Since presale buyers are unable to inspect uncompleted units, developers may take advantage of asymmetric information and release information about quality to the market selectively. The search theory also suggests that incomplete pricing information, especially for new products, will induce a less competitive market that is characterised by dispersed presale prices. Would price dispersion be reduced if developers were required to provide more quality and pricing information? In this study, we argue that this is not necessarily the case. We conduct a natural experiment using a new information disclosure ordinance governing first-hand residential sales in the Hong Kong SAR, China. We find that the ordinance reduced the price dispersion of presale units with asymmetric information about property quality, but increased their price dispersion when limited pricing information (e.g. thin trading volume) was available in the neighbourhood. As a critical test, we further show that the ordinance increased price dispersion even more after the units were completed. This suggests that the ordinance has indeed made presale pricing more difficult because developers are no longer allowed to use different strategies to test market demand.