Title: Do the Forward Sales of Real Estate Stabilize Spot Prices?
Reference Number: 1130
Publication Date: October 2004
JEL Classifcation:

C.Y. Yiu
Polytechnic University

S.K. Wong, M.K.S. Tse, and K.W. Chau
The University of Hong Kong


We examine forward sale (pre-sale) activities on the volatility of spot prices in the real estate market. The abundance of pre-sales data and major changes in regulatory control on the pre-sale market during the 90's in Hong Kong allow us to undertake empirical tests using Hong Kong's real estate data. Our results show that the volatility of spot prices increased significantly after forward sales were severely dampened by regulatory control measures introduced in 1994, but decreased again when the measures were partly relaxed in 1998. The results contribute to the long lasting debate on whether the introduction of a futures market reduces the volatility of spot prices. Previous studies were mainly conducted in markets with low transaction costs, notably financial markets. By utilizing the unique regulatory changes in the pre-sale market of Hong Kong, we are able to conduct an experiment on the conditional volatility of spot prices in a high information-cost environment. This sheds light on the mixed evidence found in the finance literature.


Key words: Forward contract, GARCH model, pre-sale, price volatility

Last modified: 06/21/2005