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Title: Measuring human behaviour on information asymmetry : a case study about shrinkage of flat sizes in Hong Kong from new institutional economics perspective
Authors: Ma, Yuen Tung.
Degree: Ph.D.
Issue Date: 2018
Abstract: Information asymmetry, a condition in which one party holds more or better information than the other in making decisions in transactions, exists in Hong Kong real estate market. Prior to the enactment of the Residential Properties (First-hand Sales) Ordinance to regulate the flat size description in the first hand sales market in April 2013, news reports had revealed that the actual useable areas of some presales housing units only accounted for 50% of the gross floor areas proclaimed in the sales brochures. Notwithstanding the alarming figures, shrinkage of flat size is in fact a lawful act in Hong Kong. Such imbalance share of information between housing developers and buyers in transactions is known as the flat shrinkage problem in Hong Kong. The flat shrinkage problem has aggravated when the property price continues to rise. Akerlof (1970) suggests that under information asymmetry, lemons tend to crowd out non-lemons. Seeing the paucity of empirical tests supporting the Lemon Theory (Akerlof 1970) in the real estate market, and even less attending to the pricing effects, this study attempts to investigate whether adverse selection process is taking place in Hong Kong's housing market with reference to the shrinkage phenomenon. An analysis of overpricing premium (if any) commanded by the housing developers arising from the asymmetric information for each class of properties in accordance to the unit sze was also conducted. On top of the Lemon Theory (Akerlof 1970), this thesis attempts to test empirically whether the Prospect Theory (Kahneman and Tversky 1979), in particular the psychosocial behaviour, applies to the flat area shrinkage problems in this market.
To measure flat area shrinkage, 13 mass housing developments located on Hong Kong Island were selected, and a total number of 16,946 flats were investigated. The empirical test results in this study show that the market was full of lemons due to the government delay in response of the law governing sales of first hand properties. It was found that the carpet areas of these housing developments had fallen short of 23% to 49% to the proclaimed gross floor area specified in the sales brochures. Analyzing a total number of 55,227 transactions between 1991 and 2013 of the subject premises, it shows that the turnover rates of units with the higher shrinkage ratios were higher than those with smaller ones. ANOVA tests have been carried out and illustrated that there are significant variations between each tenth percentile of the flats in accordance to the flat shrinkage ratios. The hedonic price model shows that every 1% fall short of area resulted in a drop of the property price by 0.8% for Class A properties, 0.15% for Class B properties and 0.04% for Class C properties in the second hand market. In other words, the developers pocket the highest de facto overpricing premium for the small size units. The model also shows that an additional reduction would be reflected in the second hand market if the flat are lemons. It means the sellers sell the units with higher shrinkage ratio, i.e. lemons, in lower prices in secondary market. A new modified model referencing the Prospect Theory Model by Kahneman and Tversky (1979) is developed attempting to quantify the human behavior in terms of housing price. The results manifest graphically that losses cause grater emotion impact on individual than does an equivalent amount of gains and it coheres with the principle of the Prospect Theory. The present study is one of the first pioneers of analyzing the information asymmetry from both new institutional economics and behavioral economics in the real estate market. This thesis contributes to the current limited empirical research on the Lemon Theory in the real estate market in Hong Kong by measuring the adverse selection as well as the overpricing premium. Base on the empirical result, the study conveys a possible forthcoming situation Nano flats first hand buyers need to face in case of economic downturns and suggest some possible approach to ease the flat size shrinkage problems. It also develops a modified model to analyze information asymmetry from the psychological context. Through the lens of new institutional economics, this study unveiled why series of new institutions were called for to tackle the asymmetric information in the past decade and also explain the evolvement of the government interventions in the past decades are being reviewed.
Subjects: Hong Kong Polytechnic University -- Dissertations
Real property -- Prices -- China -- Hong Kong
Pricing -- Econometric models
Institutional economics
Pages: xix, 251 pages : color illustrations
Appears in Collections:Thesis

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