The impact of different types of transactions on the property prices

Abstract

Previous studies on the price-volume relationship focus only on the total volume of transactions without taking into account of the nature of these transactions. While this is a reasonable approach for financial markets, such approach may have ignore some important information in the property market. We examine price-volume relation in Hong Kong property market using transaction based repeat-sales index and volume of different types of transactions. Our study distinguishes itself from others in several ways. Firstly, we have analysed the impacts of three different types of transactions (normal transactions, pre-sale transactions and confirmor transactions) on the transaction prices. Secondly, both the first and second moment effects of volume on prices are examined. Thirdly, we have also tested for structural breaks in the price volume relationships. Our data show that total transaction volume leads price, which is consistent with the search model. We found that pre-sale transactions depress spot market returns while confirmor transactions do the opposite; and that confirmor transactions stabilise property prices while pre-sales transactions increases price volatility. We propose that developerís pricing strategies have played an important role in explaining the effects of presale transaction on the first and second moment of property prices. Developers under-price their unfinished units as a means of promoting sales of their unsold units. Thus, presale transactions have an negative impact on property price returns. However, the extent of under pricing varies across different developers and phases of pre-sale, therefore as the volume of presale transaction increases, the volatility of property prices also increases. Confirmor transactions are speculative forward contract transactions and are priced in the market like other completed units. The stabilising effects of confirmor transactions are consistent with results in finance literature that transactions in the futures market stabilise spot market prices. The positive impact of confirmor transactions on property price returns is due to the incomplete nature of the property market ñ impossibility of short selling. Speculators can only speculate up but not down. We have found structural breaks in the relationships between transaction volume and property prices during the period of Asian Financial Crisis (AFC). The AFC has introduced unexpected exchange rate risks and increased the volatility interest rates. However, the above results are not materially affected by replacing structural break dummy variable with interest rate. The nature of the structural breaks remains an area for further studies.