The impact of real estate developers' pricing strategies on sales outcomes

Abstract

The price determination mechanisms in the first- and second-hand housing market are very different from each other. In the first-hand market, the developer sets offer prices (list prices) and can offer general or conditional discounts or rebates to different buyers. A problem facing the developer is to determine the pricing strategies that can achieve the desired sales outcome. This study examines the relationship between the developer's pricing strategy and sales outcome. Sales outcome in the first-hand market is characterised by the number of units sold as a percentage of the total number of units offered for sale on the first day of sale ("Sales Outcome"). Developer's pricing strategy is characterised by offer prices and various discounts and rebates.

The implementation of the Residential Properties (First-hand Sales) Ordinance in Hong Kong since 29 April 2013 requires developers to reveal information on offer prices, discounts, rebates, and units sold for all first-hand sales. The data available since this ordinance came into force were used for testing the hypotheses developed in this research.

The empirical results suggest that the "nominal discount" stated in the developer's price lists has no impact on the Sales Outcome. The real premium or discount calculated from the market price assessed based on second-hand market prices after adjusting carrying cost (in the case of presale), agency fees and other property attributes has a significant impact on Sales Outcome. All payment options that do not affect the real premium / discount have no impacts on Sales Outcome. The results strongly suggest that property buyers are very rational and not affected by money illusion, which rejects the implications of behavioural economics in the first-hand housing market.

We find empirical evidence that supports the positive impact of conditional rebates, which is a form of price discrimination, on Sales Outcome. This pricing strategy gives more rebate to investors, whose demand is more elastic, and less rebate to owner-occupiers whose demand is relatively more inelastic. Such a pricing strategy is possible due to the implementations of the Buyer Stamp Duties (BSD) since 2012 and Double Stamp Duties (DSD) since 2013, which were aimed to cool down the escalating housing prices. These stamp duties force buyers to reveal more information for tax purposes, but the information can also be used for price discrimination since it reveals whether a buyer is more likely to be an investor or owner-occupier.

The results also show that the timing of first-hand sales is important. Historical price increase has a positive impact on Sales Outcome. The result does not only show that housing units can be sold more quickly during booming periods, but also suggest that buyer's expectation about future price changes is based on their experience in the past, at least in the short run.

This study fills in the research gap of applying search and matching theory and price discrimination strategies in the first-hand housing market, and also rejects the behavioural economics in this market. The empirical results are useful for developers, purchasers, agents, and policy makers.