Abstract
The condominium presale market is characterized by information asymmetry between the developer and potential buyers. A condominium developer faces conflicting incentives to sell units quickly at a lower price to generate cash and sales momentum versus to hold prices high and endure longer marketing time to maximize revenues and maintain the property’s value. We examine the pattern of marketing duration for condominium units offered for presale in a large homogeneous development in Chengdu, China using a Cox proportional hazards model. Results indicate that a patient developer may extract a price premium on units. Diminishing risk to buyers is associated with shorter marketing duration. Time-on-market is also influenced by unit and building size as well as orientation. Market conditions may moderate the speed at which units are sold.
Highlights
Imperfect information and information asymmetry characterize real estate markets
The potential buyers form expectations about the quality of the construction and the potential for developer default without the ability to fully monitor construction or other developer actions. Such information asymmetry is especially evident in the new condominium presale market common in Asian countries
We examine the pattern of TOM for condominium units offered for presale in several phases of a single large development in Chengdu, China
Summary
Imperfect information and information asymmetry characterize real estate markets. Some of the information asymmetry between new house developers/sellers and potential buyers arises from the seller’s superior knowledge about the property and the development company that is not shared with the buyers. The potential buyers form expectations about the quality of the construction and the potential for developer default without the ability to fully monitor construction or other developer actions. Such information asymmetry is especially evident in the new condominium presale market common in Asian countries. The developer reveals no information about the financial health of the company or the development while marketing the unfinished product. Information asymmetry is inherent, which creates a moral hazard problem for the buyer. This may, in turn, influence final negotiated prices as well as time-on-market (TOM)
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