Open AccessInternational Real Estate Review
Author(s) -
Ко Wang,
Yuqing Zhou,
Su Han Chan,
K. T. Chau
Publication year - 2000
Publication title -
journal of the asian real estate society
Language(s) - English
Resource type - Journals
ISSN - 1029-6131
DOI - 10.53383/100023
Subject(s) - real estate , volatility (finance) , capitalization rate , point (geometry) , cost approach , rational expectations , price on application , real estate development , corporate real estate , financial economics , real estate investment trust , economics , econometrics , business , finance , actuarial science , mathematics , geometry
Studies on the calibration of subjective probabilities find that people tend to over-estimate the precision of their knowledge. In this paper we develop a semi-rational model and apply it to the real estate markets in Hong Kong and other Asian countries. The key point is that a person is rational about her/his private information until her/his private information is confirmed by a clearly defined market signal. Using a pre-sale as a mechanism of updating a developer's beliefs, this paper analyzes the impact of over-confidence on overbuilding and cycles in real estate markets. Our finding indicates that a pre-sale activity will increase the magnitude of over-building and over-confidence will increase the volatility in real estate markets. Our model also has implications to the well-established literature dealing with the issue of over-capacity in many industrial sectors.