How do developers price new housing in a highly oligopolistic city?

Abstract

The profiteering developer is a common figure in debates over housing policy. Governments increasingly use developer profits to justify policies like inclusionary housing. Yet we actually understand little about the competitiveness of housing development. One unresolved question is whether developers use market power to profit when selling new units, especially in highly concentrated markets. We use the case of Hong Kong, where the five largest developers build almost two-thirds of new housing units, to address this question. Using a repeat-sales approach, we find that new condominiums sell at a discount, not a premium. We attribute this lack of market power to the resalable feature of durable goods – the discount is larger when more re-sellers are located nearby – as well as the need for liquidation – the discount is larger when developers have to sell more units simultaneously. Our results suggest that the first-hand market, even in a highly concentrated market, is competitive. They add to a growing body of research work on the role of new housing in affordability, and invite further study of competitiveness in different kinds of housing markets.