Selling Mechanisms and The Australian Housing Market

Abstract

This thesis examines selling mechanisms relevant mainly to auctions and applicable in the context of the housing market. In the first two chapters a context is described in which the seller of an object has private information about its value that is important to potential buyers. If the seller is unable to reveal this information to the buyers at no cost, the problem of adverse selection arises. Among other examples, auctions of arts, wines, and residential properties are most relevant to the current study. The sellers in these markets observe some private characteristics of their objects that are important to buyers but not revealable to them at no cost. In the first chapter we study some common selling mechanisms in this setting. Specifically, we study an ascending auction with two different reserve price regimes for the seller: first, disclosing the reserve price at the beginning of the auction; and second, keeping the reserve price secret and reserving the right to accept or reject the auction price after the bidding ends. We also study the common posted-price mechanism for the purposes of comparison. Throughout this chapter the assumption is that the seller chooses the mechanism from the ex ante point of view-that is, before observing her signal. Thus, the choice of mechanism itself does not reveal any further information to the buyers. The results in the first chapter suggest that in a one-shot game the seller can realise a higher ex ante expected payoff by choosing the secret reserve price regime than the other two mechanisms. At the end this chapter a dynamic setting is studied to examine the possibility of an extension of these static results to a dynamic case. Most of the results for the one-shot game are extendable to the proposed dynamic game.

In the second chapter we study an informed seller's best interest among the two previously mentioned reserve price regimes at the interim stage-that is, after the seller has observed her private information. We study how the seller's expected payoff could change if she observes the signal and then chooses the reserve price mechanism. In this case the choice of mechanism itself could reveal some information to buyers. The results show the conditions under which an informed seller, after observing her signal, chooses to keep the reserve price secret or discloses the reserve price.

The last two chapters focus specifically on the housing market. The third chapter adds to the theoretical literature of the housing market by proposing a more realistic selling mechanism applicable to this market: the one in which the seller posts a price to attract potential buyers to make a counteroffer. This game is studied in a dynamic setting with the possibility of more than one potential buyer arriving at each period. In the event that one buyer arrives, the seller engages in negotiation with that buyer; in the event that multiple buyers arrive, the seller runs an auction with a reserve price. This explains why sometimes sale prices are higher than the asking price and at the same time proposes a role for the asking price in this market. Other small variations of this mechanism are also studied for the purposes of comparison.

The final chapter is an empirical study of the Sydney housing market. We use comprehensive data on the Sydney housing market composed of 25,489 observations for properties sold in the Sydney region in 2011. We consider the fact that both the seller of the property and the real estate agent have a common goal: to sell the property at the highest possible price in the shortest amount of time. The analysis is divided into two major parts. First, we estimate a two-stage least square model to analyse which parameters affect time on the market for a property. Second, we propose a probit model that estimates the parameters that affect a revision in list prices. The results suggest that overpricing increases time spent on the market, and properties with a revised list price stay on the market for a longer time.