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Do the Forward Sales of Real Estate Stabilize Spot Prices?

27 Pages Posted: 6 Nov 2005 Last revised: 7 Jun 2012

Siu Kei Wong

University of Hong Kong

Chung Yim Edward Yiu

Chinese University of Hong Kong - Department of Geography and Resource Management

K. S. Maurice Tse

The University of Hong Kong - School of Economics and Finance

K.W. Chau

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

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Date Written: March 25, 2004

Abstract

We examine the effect of forward sale (pre-sale) activities on the volatility of spot prices in the real estate market. The abundance of pre-sales data and major changes in regulatory control on the pre-sale market during the 90's in Hong Kong allow us to undertake empirical tests using Hong Kong's real estate data. Our results show that the volatility of spot prices increased significantly after forward sales were severely dampened by regulatory control measures introduced in 1994, but decreased again when the measures were partly relaxed in 1998. The results contribute to the long lasting debate on whether the introduction of a futures market reduces the volatility of spot prices. Previous studies were mainly conducted in markets with low transaction costs, notably financial markets. By utilizing the unique regulatory changes in the pre-sale market of Hong Kong, we are able to conduct an experiment on the conditional volatility of spot prices in a high information-cost environment, thereby shedding light on the important role of forward housing contracts in providing price expectation information for spot trading.

Keywords: Forward contract, GARCH model, pre-sale, price volatility

JEL Classification: D83, E32, R21

Suggested Citation

Wong, Siu Kei and Yiu, Chung Yim Edward and Tse, K. S. Maurice and Chau, K.W., Do the Forward Sales of Real Estate Stabilize Spot Prices? (March 25, 2004). The Journal of Real Estate Finance and Economics, 32 (3), 289-304.. Available at SSRN: https://ssrn.com/abstract=833305

Siu Kei Wong (Contact Author)

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, HK
China

Chung Yim Edward Yiu

Chinese University of Hong Kong - Department of Geography and Resource Management ( email )

Shatin
the New Territories
Hong Kong
Hong Kong

HOME PAGE: http://www.grm.cuhk.edu.hk/eng/people/ppl/fac_YiuEdward.html

Maurice K. S. Tse

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong
011-852-2857-8636 (Phone)
011-852-2548-1152 (Fax)

Kwong Wing Chau

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)

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