DEVELOPERS' MARKET POWER AND PRIVATE HOUSE PRICES

Abstract

The presence of market power often leads to allocative inefficiency. In the private housing market, the presence of market power could have an adverse impact on the housing market as a whole leading to higher social cost. This research examines the relationship between market power and transaction prices in the private housing market. It contributes to the literature of industrial organization studies in real estate. In particular, the Structure-Conduct-Performance (SCP) paradigm, which hypothesized that concentration leads to market power and subsequently higher prices for consumers, forms the basis of this study. The research objective is to study the competitive level of the private housing market and the relationship between developers’ market power and housing prices. The study proposes a positive relationship between market power and private housing sales price. Both static and dynamic measures of market power are used to test the relationship and the results suggest that market power and housing price are positively correlated. This positive relationship affirms that there is an incentive for developers to concentrate and gain market power leading to unfavourable pricing for the consumer. Finally, this research can aid policy makers to maintain an efficient market through the observation of the developers’ concentration activity. The policy implication arising from this study suggest that centralized land sales such as the URA’s sale of site programme directly affects developers’ concentration in residential districts and this could lead to allocative inefficiency if developers could garner market power through aggressive bidding.