Abstract
Based on the real option theory, this paper studies the impact of uncertainty on the timing decisions required in housing development and sales. Data of newly-built houses and corresponding plots in Hangzhou, China, are used for empirical analysis. In order to better reflect the changes in market demand under frequent policy intervention, in addition to the usual price volatility, this paper introduces the volatility of trading volume to measure the uncertainty of China’s real estate market. The results show that the volatility of trading volume has a significant impact on timing decisions. Also, trading volume volatility can better reflect the characteristic of deferred option than can price volatility, especially during the sales phase. This study provides evidence to support Bar-Ilan and Strange’s (1998) research of sequential investment. Because of the existence of the second option, i.e., sales timing, the starts in the first stage are not too sensitive to uncertainty. In the case of the second option, the longer the construction period is, and the lower the cost of the first stage is, the higher will be the probability of triggering the start. In addition, the characteristics of market risk aversion are obvious in the study area, especially in the suburban area.
Highlights
China’s real estate industry is experiencing rapid development
The timing decisions related to both land development and sales are two problems that are bound up with the interests of the developers themselves; they are of vital importance to the regulation of the real estate market
The empirical results show that a one-standard deviation increase in price uncertainty reduces the likelihood of development by 11%
Summary
China’s real estate industry is experiencing rapid development. Holding vacant land and using a multi-phased sales strategy are two prominent phenomena in China’s real estate market. In view of the problem of vacant land, “the Law on Urban Real Estate Administration”, which was promulgated in 1994, stipulates that a certain land idling fee can be levied on those lands which are not developed within a year after the start date arranged in the contract. In theoretical research and in some empirical studies in other countries, most results confirm that uncertainty will delay the timing of an investment Whether or not this conclusion applies to China’s real estate market still needs further verification. These factors include development density, the standard of housing decoration, etc Other variables, such as the number of sales periods, are taken into consideration, in order to observe the influence of uncertainty on the timing decision of sales during different phases.
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