Please use this identifier to cite or link to this item: http://scholarbank.nus.edu.sg/handle/10635/23088
Title: Price discovery between residential land price and house price
Authors: LEE SZE TECK
Keywords: price discovery, land prices, property prices
Issue Date: 9-May-2007
Source: LEE SZE TECK (2007-05-09). Price discovery between residential land price and house price. ScholarBank@NUS Repository.
Abstract: This study seeks to determine the relationship between land price and house price in the short and long run. In the short run, the Ricardian theory predicts that house price influenced land prices while in the long run, the Neo-Classical theory predicts that land prices influenced house price because of competition for land.The Johansen co-integration (long run relationship) and Granger causality (short run relationship) test are chosen to study the relationship between residential land price and house price. The tests require the raw data on land prices and house prices to be transformed into time series data.We collect data on land sales and property prices. We first construct a constant quality price index for urban land transactions using the hedonic approach. Examination tests on goodness of fit, significance of coefficients, ability to forecast price trends and consistency of seasonal patterns were carried out to ensure the consistency and reliability of the land price index. The widely available URA property price index is used as a proxy for property prices.The land price index and the property price index are then matched against each other in a co-integration test to determine if there exists a long term relationship between them. The evidence indicates that there is a long term relationship between them. Therefore these two time indices are modelled in an error correction framework. The empirical results modelled in an error-correction framework indicate that Granger causality runs from the housing market to the land market. We did not find any causality relationship from the land market to the housing market in Singapore. This implies that changes in the land market do not cause changes in the housing market in the short run. Different model specifications and different house price indices were used to ensure that our results are not biased. The error correction term for house prices is small compared to the error correction term for land prices. Land prices are more volatile (Somerville, 1999 and Davis and Heathcote, 2005) while house prices revert slowly to equilibrium and are sticky. This is consistent with Blinder (1991). Instead of cutting (increase) prices when demand is low (high), developers may elect to provide more (less) auxiliary incentives. In the land market, developersa?? bid for land is affected by the degree of competition (Ooi, Sirmans and Turnbull, 2006). Depending on the number of competitors, the bid for different parcels of land can be close to or above the equilibrium price in different periods. This could be the reason why land prices revert to equilibrium faster than house prices. The findings imply that land prices are affected by house prices. Because of the cross-market interactions, an integrated approach to understanding the systems of land and house markets should be adopted. Having a good knowledge of cross-market causality will also help prospective investors to take advantage of future price movements in the land market by looking at how prices are behaving now in the housing market.
URI: http://scholarbank.nus.edu.sg/handle/10635/23088
Appears in Collections:Master's Theses (Open)

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TABLE OF CONTENT.pdf42.01 kBAdobe PDF

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01 Introduction.pdf52.33 kBAdobe PDF

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02 Literature Review.pdf347.77 kBAdobe PDF

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03 Methodology.pdf173.54 kBAdobe PDF

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04 Data Analysis.pdf58.45 kBAdobe PDF

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05 Land Index.pdf90.12 kBAdobe PDF

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06 Granger.pdf171.05 kBAdobe PDF

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07 Conclusions.pdf44 kBAdobe PDF

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Bibliography.pdf48.97 kBAdobe PDF

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