The Prominence Effect in Shanghai Apartment Prices

“Thus, according to the prominence principle, developers underweight the importance of floors relative to buyers. This explains why good (apartment) floors sell faster than bad floors.”

Abstract (Via Booth)

A field study conducted in Shanghai identified a robust inconsistencybetween real estate developers’ desired sales pattern (selling all apartments in a building at similar rates) and the actual sales pattern (selling good apartments faster). The authors explain this inconsistency using Tversky, Sattath, and Slovic’s (1988) prominence principle, according to which buyers, who were in a choice mode, weighed the desirability of floors more heavily than developers, who were in a matching mode when setting prices. This explanation is corroborated by controlled experiments involving potential home buyers and professional real estate price setters. The research relates an intriguing anomaly originally found in paper-and-pencil surveys to a real-world issue in oneof the world’s most active markets. These findings also have implications for issues beyond real estate markets.

Introduction (Via Booth)

Since the new millennium, China has emerged as one of the world’s most formidable consumer markets. In 2004, the size of the consumer market was estimated at 36 million urban Chinese, and every year, approximately 20 million Chinese turn 18 years of age (Grant 2006). The impact of this consumer boom has been particularly apparent in the Chinese real estate market, one of the most active real estate markets in the world. During the late 1990s, the Chinese government enacted several radical changes in the regulation of state-provided housing to stimulate economic growth. In 1999, the state lifted a ban on the resale of privatized housing. These measures led to an explosion in the Chinese housing market, which was subsequently estimated as contributing 1.5% of annual growth in gross domestic product (The Economist 2001). Rapidly rising housing prices—in Shanghai, prices have nearly doubled between 2000 and 2004 (The Economist 2005)—have fueled billions of dollars in housing construction. Since 1996, 67,333 residential properties were sold in Shanghai. In 2000 alone, approximately 7.5 million square meters (80.73 million square feet) of existing houses were sold in Shanghai, with a total transaction value of roughly 65.6 billion renminbi (RMB) (approximately US$8 billion) (Ye 2004). At a more micro level, real estate developers are increasingly relying on careful pricing practices to avoid missing profitable opportunities in this fast-paced but otherwise relatively young housing market.

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About Miguel Barbosa

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28. December 2009 by Miguel Barbosa
Categories: Behavioral Economics, Curated Readings | Leave a comment

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