Agency Theory and Foreclosure Sales of Properties

Journal of Property Science, 1, 1, 16-24, 2008

10 Pages Posted: 29 May 2012 Last revised: 12 Aug 2013

See all articles by K.W. Chau

K.W. Chau

The University of Hong Kong - Ronald Coase Centre for Property Rights Research - Economics

R. Ng

The University of Hong Kong

Multiple version iconThere are 2 versions of this paper

Date Written: January 19, 2008

Abstract

This study analyzes the effect of foreclosure status on residential property price using Hong Kong data. Results of previous studies on the effect of foreclosure status on property price have been mixed. Some suggested that foreclosed properties are sold at a discount, while others provided contrary evidence. In this study, we propose that agency issues, which were ignored in previous studies, have an important role to play in determining the prices of foreclosed properties under different market conditions. When the market is booming, the mortgage loan on a property is likely to be lower than its market value. The bank’s objective is to sell the property as quickly as possible to recover the loan. The tradeoff between time-on-the-market and transaction price implies that foreclosed properties are sold at a discount to market prices. On the other hand, during market downturns, the mortgage loan is likely to be higher than the market value. The banks will have less incentive to trade time-on-the-market for price, and foreclosed properties are less likely to be sold at a discount, and thus add bad debts into their books. Empirical results from Hong Kong suggest that that foreclosed properties are sold at a 10% discount in an up market, but are sold at no discount in a down market. The results are consistent with our prediction.

Keywords: Agency theory, foreclosure, hedonic price model, Hong Kong, residential properties

JEL Classification: D23, R29

Suggested Citation

Chau, Kwong Wing and Ng, R., Agency Theory and Foreclosure Sales of Properties (January 19, 2008). Journal of Property Science, 1, 1, 16-24, 2008, Available at SSRN: https://ssrn.com/abstract=2070314

Kwong Wing Chau (Contact Author)

The University of Hong Kong - Ronald Coase Centre for Property Rights Research - Economics ( email )

Ronald Coase Centre for Property Rights Research
Pokfulam Road
Hong Kong
Hong Kong
(852)28592128 (Phone)
(852)25599457 (Fax)

R. Ng

The University of Hong Kong

Pokfulam Road
Hong Kong, Pokfulam HK
China

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
155
Abstract Views
650
rank
101,941
PlumX Metrics