Expectation Adjustment in the Housing Market: Insights from the Scottish Auction System

Abstract

This paper examines price expectation adjustment of house buyers and sellers to rapid changes in the housing market using data from Scotland where houses are sold through ‘first-price sealed-bid’ auctions. These auctions provide more information on market signals, incentives and the behaviour of market participants than private treaty sales. This paper therefore provides a theoretical framework for analysing revealed preference data generated from these auctions. We specifically focus on the analysis of the selling to asking price difference, the ‘bid-premium’. The bid-premium is shown to be affected by expectations of future price movements, market duration and high bidding frequency. The bid-premium reflects consumer's expectations, adapting to market conditions more promptly than asking price setting behaviour and final sale prices. The volatile conditions of the recent housing market bubble are fully reflected in the bid-premium, whereas the asking and sale prices are much less prone to rapid movements.

Keywords::

• Housing markets
• price expectations
• auctions
• bid-premium

Notes

¹ The first-price sealed-bid auction is one in which the buyer making the highest bid claims the object and pays only the amount he has bid (Milgrom & Weber, 1982).

² Each bidder knows the value of the object to herself, but does not know the values of the object to the other bidders that are independent to her value.

³ ‘The common value theory allows for statistical dependence among bidders' value estimates, but offers no role for differences in individual tastes’ (Milgrom & Weber, 1982, p. 1095).

⁴ That includes accessibility, socioeconomic and environmental attributes.

⁵ After dropping by 1258 transactions due to incomplete data or errors.

⁶ The t-stat of 22.43 rejects, at the 99 per cent level, the null hypothesis of the difference between the means of the two distributions being zero.

⁷ Noise insulation is expected in areas with noise pollution problems, unfortunately we could not obtain noise data to confirm this.