Abstract
We analyse land transaction and residential development data from Beijing, China and identify that developers’ evaluation of land transaction exhibits reference dependence and loss aversion. Developers with prior land transaction losses set higher house prices than those without prior losses. This effect is strongest at the beginning and towards the end of the property sales period. It is moderated by developers’ ownership structure and listing status. Privately-owned firms experience stronger effects than their state-owned counterparts, whereas unlisted firms are more strongly affected than their listed counterparts. Results have implications on the relationship between the land and the housing markets in China. In a booming land market where land acquisition entails a high price, developers will transfer excess land price to house prices, thereby increasing the latter. The land market plays an integral role in managing housing prices in China.
Highlights
Hedonic price models are routinely used to price residential properties
The difference is great in the average house prices, i.e. 22,920 yuan/m2 and 16,907 yuan/m2, which is consistent with our hypothesis that developers in the loss domain set high house prices to pursue breakeven
Using land transaction and apartment sales data in Beijing, this paper shows that prior losses from land transactions affect developer’s pricing decisions for new homes
Summary
Hedonic price models are routinely used to price residential properties. In such models, the pricing decision is assumed rational, and they only consider attributes that add value to properties. If real estate developers are affected by loss aversion due to previous land acquisition losses, they are likely to pursue breakeven by setting the asking prices of their housing units above the fair market prices. The study of such behaviours are of economic and policy importance. We contend that the most loss-averse developers took the longest time to sell out their properties, i.e. eight years in our sample These findings add to the fastgrowing behavioural literature in real estate research and highlight the important role of land market in China’s housing market.
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