Rational Pricing Responses of Developers to Supply Shocks: Evidence from Singapore

32 Pages Posted: 5 Jun 2020 Last revised: 3 Aug 2021

See all articles by Mi Diao

Mi Diao

National University of Singapore (NUS) - Department of Real Estate

Yi Fan

National University of Singapore (NUS) - Department of Real Estate

Tien Foo Sing

National University of Singapore (NUS) - Department of Real Estate

Date Written: March 8, 2020

Abstract

Singapore’s government imposed a new transaction tax in the form of an Additional Buyer’s Stamp Duty (ABSD) on developers who fail to sell all units within 5 years for projects that commenced after 2011. We find significant evidence that the ABSD shock triggers rational responses by private developers, who cut prices to clear unsold housing units. Developers of the ABSD-affected projects strategically cut prices by 2.8% to sell units in year 5 relative to other projects that are not subject to the ABSD. We also find that the treatment effects come mostly from three groups of developers, which include large developers, small project developers and local developers. Liquidity constraints and differential reference points are two potential channels that drive the differential price cutting responses of developers to the policy shock in the housing market.

Keywords: Rational responses, transaction tax, liquidity constraint, reference points, government’s intervention, private housing markets

JEL Classification: D22, D23, R31

Suggested Citation

Diao, Mi and Fan, Yi and Sing, Tien Foo, Rational Pricing Responses of Developers to Supply Shocks: Evidence from Singapore (March 8, 2020). Available at SSRN: https://ssrn.com/abstract=3550620 or http://dx.doi.org/10.2139/ssrn.3550620

Mi Diao

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

Yi Fan

National University of Singapore (NUS) - Department of Real Estate ( email )

United States

Tien Foo Sing (Contact Author)

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

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