Formation Mechanism Of Reservation Price In Second-hand Housing Market

Rapid urbanization in China has brought a lot of challenges to housing supply incities. On one hand, in the long run the limited supply of urban land for construction,as well as the longer land collection cycle will constrain new house supply. On theother hand, the aging process of population will release housing supply intosecond-hand housing market in large numbers. During the past few years,second-hand housing market has been active and the trading volume has graduallyexceeded that in new housing market in large cities. Therefore, research insecond-hand market is meaningful both in theory and practice.In this thesis, we start our research from reservation price and focus on thedecision-making process of buyers and sellers in second-hand market, or how theirdecision will be affected and adjusted by the past “price signal” and by the currentsituation when a transaction is about to make. Specifically, this paper researches ontwo kinds of cognitive bias, which are loss aversion of sellers and anchoring effect ofbuyers. Equity constraint of sellers is also under consideration. Based on that, wecontinue our research on how these effects affect macro housing market.The main chapters are organized as following: phenomenondescription—theoretical analysis—modeling—numerical simulation—empiricalstudy—conclusion. As the analytical framework name suggests, theoretical analysis,numerical simulation and empirical study are all applied to this thesis. Moreover, wesee housing price in the perspective of idiosyncrasies of transaction instead of housingheterogeneity. The main conclusions are as following:We enhance the existed models and quantitatively test the effects on reservationprice of two cognitive bias and equity constraint in second-hand housing market.Empirical results show that cognitive bias of sellers and buyers, as well as equityconstraint have significantly affect their reservation price and in this way eventuallyaffect transaction price.Moreover, we extend loss aversion and equity constraint from falling market torising market. Empirical results show that even in rising market reservation price ofsellers are also influenced by their purchase price and by their outstanding mortgage. In the end, this thesis analyzes the decision-making process though an simplegame model and qualitatively analyzes how seller and buyer behavior can influencetransaction price and volume in second-hand market. We also simulate changes intransaction price and volume when there is a rising shock or falling shock, and thenwe discover price is easier to rise than to fall in China, which can be called ‘priceratchet effect’.Our research is based on Chinese rising house market, and therefore we enrichand extend the research on loss aversion and anchoring and equity constraint. Ournumerical simulation provides some basic conclusion to improve housing index andthe empirical results can be used by governments, enterprises, as well as buyers andsellers.