Contract Rescission in the Real Estate Presale Market

69 Pages Posted: 3 Dec 2020 Last revised: 12 Oct 2021

See all articles by Quan Gan

Quan Gan

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Maggie Hu

The Chinese University of Hong Kong

Wayne Xinwei Wan

Monash University

Date Written: September 29, 2021

Abstract

This study documents that over 10% of the presale contracts in the Hong Kong housing market between 1996 and 2014 were rescinded, resulting in a loss of HKD 436.67 million per year. We then investigate potential determinants of contracts rescission from a novel perspective of option theory. We find out-of-the-money presale contracts (with market price being lower than the outstanding payment at settlement) have a 12.2% higher rescission rate. The rescission rate is also higher when presale homebuyers bear more of the price risk as proxied by option delta and time-induced risk as proxied by time-to-maturity. Moreover, we find rescission rates drop significantly after the Hong Kong government’s housing market macroprudential measures. Our findings shed light on understanding the mechanism of presale contracts rescission, homebuyers’ strategic default behaviour, and the role of housing market regulation in mitigating rescissions.

Keywords: Presale contract, Real estate option, Presale rescission rate, Housing market regulation

JEL Classification: G12, G14, G21, H31

Suggested Citation

Gan, Quan and Hu, Maggie and Wan, Wayne Xinwei, Contract Rescission in the Real Estate Presale Market (September 29, 2021). Available at SSRN: https://ssrn.com/abstract=3738130 or http://dx.doi.org/10.2139/ssrn.3738130

Quan Gan

The University of Sydney - Discipline of Finance ( email )

Discipline of Finance
University of Sydney
Sydney, NSW 2006
Australia

HOME PAGE: http://sydney.edu.au/business/staff/quang

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Maggie Hu

The Chinese University of Hong Kong ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Hong Kong, N.T.
Hong Kong

Wayne Xinwei Wan (Contact Author)

Monash University ( email )

Wellington Road
Clayton
Melbourne, VIC 3168
Australia

HOME PAGE: http://xinweiwan.weebly.com

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