Rational Pricing Responses of Developers to Supply Shocks: Evidence from Singapore
32 Pages Posted: 5 Jun 2020 Last revised: 3 Aug 2021
Date Written: March 8, 2020
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: Suggested Citation