Over-Confidence and Cycles in Real Estate Markets: Cases in Hong Kong and Asia

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Over-Confidence and Cycles in Real Estate Markets: Cases in Hong Kong and Asia

Author Info

Ko Wang () (Department of Finance, California State University-Fullerton, California, USA)
Yuqing Zhou () (Department of Finance, The Chinese University of Hong Kong)
Su Han Chan () (Department of Finance, California State University-Fullerton, California, USA)
K. W. Chau () (Department of Real Estate and Construction, The University of Hong Kong)

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Ko Wang

Abstract

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.

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Publisher Info
Article provided by Asian Real Estate Society in its journal International Real Estate Review.

Volume (Year): 3 (2000)
Issue (Month): 1 ()
Pages: 93-108
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Handle: RePEc:ire:issued:v:03:n:01:2000:p:93-108

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Postal: Asia Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
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Postal: Asian Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
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Find related papers by JEL classification:
L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

Cited by:
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Charles K. Leung & Kelvin S. Wong, 2004. "The Construction and Related Industries in a Changing Socio-Economic Environment: The Case of Hong Kong," International Real Estate Review, Asian Real Estate Society, vol. 7(1), pages 139-170. [Downloadable!]
Other versions:
- Charles Ka Yui Leung & Kelvin S. Wong, 2004. "The Construction and Related Industries in a Changing Socio-Economic Environment: The case of Hong Kong„X," Discussion Papers 00011, Chinese University of Hong Kong, Department of Economics, revised May 2005. [Downloadable!]
Chien-An Wang & Chin-Oh Chang, 2008. "Is It a Heavy Log that Broke the Camel’s Back? Evidence of the Credit Channel in Taiwan’s Construction Industry," International Real Estate Review, Asian Real Estate Society, vol. 11(1), pages 38-64. [Downloadable!]
Frank Caliendo & Kevin X.D. Huang, 2007. "Overconfidence and Consumption over the Life Cycle," Working Papers 0712, Department of Economics, Vanderbilt University. [Downloadable!]
Su Han Chan & Ko Wang & Jing Yang, 2003. "Pricing Factors in Real Estate Markets: A Simple Preference Based Approach," International Real Estate Review, Asian Real Estate Society, vol. 6(1), pages 102-120. [Downloadable!]

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