Long- and short-term price behaviors in presale housing markets in Taiwan

Abstract

In real estate transactions, buyers of presale houses incur greater risks than do buyers of pre-existing houses; consequently, presale housing prices should be discounted. However, in many areas, short-term presale housing markets often overheat. To illustrate this phenomenon, this paper adopts two theoretical models to analyze long-term equilibrium and short-term changes in the presale housing market. First, the cobweb model demonstrates that demand responds immediately to sudden shocks in the housing market. Because the supply of the spot housing market is lagging, the demand may be transferred to the forward market. Therefore, even though the price–volume relationship in the presale market is balanced in the long term, it may still be affected by sudden demand-side shocks and overheating in the short term. Second, the paper uses a forward contract pricing model to illustrate short-term fluctuations in the presale housing market and concludes that governments should raise interest rates and land holding costs to control the overheating of the presale housing market. City-level data from Taiwan are used to verify the long- and short-term price behaviors indicated by the two models.