IDEAS home Printed from https://ideas.repec.org/a/ire/issued/v19n042016p411-434.html

The Pricing of Construction Loans

Author

Listed:
  • Su Han Chan

    (Johns Hopkins University)

  • Ko Wang

    (Johns Hopkins University)

  • Jing Yang

    (California State University - Fullerton)

Abstract

In this study, we use a simple 2-period game theoretic model to determine a mutually acceptable interest rate for a construction loan. This mutually acceptable interest rate is the rate that makes a developer indifferent between using 100% equity financing and a construction loan. It is also the highest interest rate that a developer is willing to pay and a bank is willing to lend. The three risk factors identified in the model are the loss, leverage and first-phase loan ratios. Our analytical and numerical analyses indicate that the derived mutually acceptable interest rate has desirable properties as the rate increases with an increase in the three identified risk factors.

Suggested Citation

  • Su Han Chan & Ko Wang & Jing Yang, 2016. "The Pricing of Construction Loans," International Real Estate Review, Global Social Science Institute, vol. 19(4), pages 411-434.
    • Handle: RePEc:ire:issued:v:19:n:04:2016:p:411-434
    as

    Download full text from publisher

    File URL: https://www.gssinst.org/irer/wp-content/uploads/2020/10/v19n4-the-pricing-of-construction-loans.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kenneth M. Lusht & Bruce E. Leidenberger, 1979. "A Research Note on Factors Associated with Troubled Residential Construction Loans," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 7(2), pages 243-252, June.
    2. Su Han Chan & Fang Fang & Jing Yang, 2014. "Presales, Leverage Decisions and Risk Shifting," Journal of Real Estate Research, American Real Estate Society, vol. 36(4), pages 475-510.
    3. Brian A. Ciochetti & Rose Neng Lai & James D. Shilling, 2015. "The Role of Public Markets in International Real Estate Diversification," International Real Estate Review, Global Social Science Institute, vol. 18(2), pages 155-175.
    4. Jyh-Bang Jou, 2011. "Optimal Capital Structure in Real Estate Investment: A Real Options Approach," International Real Estate Review, Global Social Science Institute, vol. 14(1), pages 1-26.
    5. Chan, Thomas Sai-fan, 1999. "Residential Construction and Credit Market Imperfection," The Journal of Real Estate Finance and Economics, Springer, vol. 18(1), pages 125-139, January.
    6. Sanjay Sehgal & Mridul Upreti & Piyush Pandey & Aakriti Bhatia, 2015. "Real Estate Investment Selection and Empirical Analysis of Property Prices: Study of Select Residential Projects in Gurgaon, India," International Real Estate Review, Global Social Science Institute, vol. 18(4), pages 523-566.
    7. Shan Min Charmaine Cheok & Tien Foo Sing & I-Chun Tsai, 2011. "Diversification as a Value-Adding Strategy for Asian REITs: A Myth or Reality?," International Real Estate Review, Global Social Science Institute, vol. 14(2), pages 184-207.
    8. Andrew J. Collins & David M. Harrison & Michael J. Seiler, 2015. "Mortgage Modification and the Decision to Strategically Default: A Game Theoretic Approach," Journal of Real Estate Research, Taylor & Francis Journals, vol. 37(3), pages 439-470, July.
    9. Su Chan & Ko Wang & Jing Yang, 2012. "Presale Contract and its Embedded Default and Abandonment Options," The Journal of Real Estate Finance and Economics, Springer, vol. 44(1), pages 116-152, January.
    10. Albdulkarim K. Alhowaish, 2015. "Causality between the Construction Sector and Economic Growth: The Case of Saudi Arabia," International Real Estate Review, Global Social Science Institute, vol. 18(1), pages 131-147.
    11. Mahalia Jackman, 2010. "Investigating the Relationship between Residential Construction and Economic Growth in a Small Developing Country: The Case of Barbados," International Real Estate Review, Global Social Science Institute, vol. 13(1), pages 109-116.
    12. Rose Neng Lai & Ko Wang & Yuqing Zhou, 2004. "Sale before Completion of Development: Pricing and Strategy," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(2), pages 329-357, June.
    13. Brent W. Ambrose & Joe Peek, 2008. "Credit Availability and the Structure of the Homebuilding Industry," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(4), pages 659-692, December.
    14. Su Han Chan & Fang Fang & Jing Yang, 2008. "Presales, Financing Constraints and Developers?Production Decisions," Journal of Real Estate Research, American Real Estate Society, vol. 30(3), pages 345-376.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Huang, Xianjing & Huang, Zhigang & Nie, Keyu, 2025. "Housing presale systems and entrepreneurial default risk," Finance Research Letters, Elsevier, vol. 86(PE).
    2. Quan Gan & Maggie Rong Hu & Wayne Xinwei Wan, 2022. "Contract rescission in the real estate presale market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(4), pages 1054-1106, December.
    3. Su Han Chan & Ko Wang & Jing Yang, 2011. "A Rational Explanation for Boom-and-Bust Price Patterns in Real Estate Markets," International Real Estate Review, Global Social Science Institute, vol. 14(3), pages 257-282.
    4. Lu, Chien-Lin & Liao, Wen-Chi & Peng, Chien-Wen, 2020. "Developers’ perspectives on timing to build: Evidence from microdata of land acquisition and development," Journal of Housing Economics, Elsevier, vol. 49(C).
    5. Su Chan & Ko Wang & Jing Yang, 2012. "Presale Contract and its Embedded Default and Abandonment Options," The Journal of Real Estate Finance and Economics, Springer, vol. 44(1), pages 116-152, January.
    6. Rose Neng Lai & Lawrence Hoc Nang Fong, 2021. "Development Strategies in a Market of High Vacancies and Sticky Rates – The Case of the Hotel Industry," International Real Estate Review, Global Social Science Institute, vol. 24(3), pages 363-383.
    7. Eddie Chi Man Hui & Cong Liang & Ziyou Wang & Yuan Wang, 2016. "The roles of developer’s status and competitive intensity in presale pricing in a residential market: A study of the spatio-temporal model in Hangzhou, China," Urban Studies, Urban Studies Journal Limited, vol. 53(6), pages 1203-1224, May.
    8. Jin Choi & Henning Rasmussen & Matt Davison, 2012. "Fair Value and Risk Profile for Presale Contracts of Condominiums," The Journal of Real Estate Finance and Economics, Springer, vol. 44(4), pages 472-504, May.
    9. Ball, Michael & Meen, Geoffrey & Nygaard, Christian, 2010. "Housing supply price elasticities revisited: Evidence from international, national, local and company data," Journal of Housing Economics, Elsevier, vol. 19(4), pages 255-268, December.
    10. L. Li & K. W. Chau, 2019. "What Motivates a Developer to Sell before Completion?," The Journal of Real Estate Finance and Economics, Springer, vol. 59(2), pages 209-232, August.
    11. Robert Edelstein & Peng Liu & Fang Wu, 2012. "The Market for Real Estate Presales: A Theoretical Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 45(1), pages 30-48, June.
    12. Ming-Cheng WU & I-Cheng LIN & Yi-Ting HUANG & Chang-Rong, 2015. "Forecasting Prices Of Presale Houses: A Real Option Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 143-158, March.
    13. Fabrice Larceneux & Denis Guiot, 2019. "The role of services in homebuyers’ attitudes: A field experiment in the French off-plan housing market," Urban Studies, Urban Studies Journal Limited, vol. 56(14), pages 2880-2896, November.
    14. Asish Saha & Hock-Eam Lim & Goh-Yeok Siew, 2021. "Housing Loan Repayment Behaviour in Malaysia: An Analytical Insight," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 20(2), pages 1-19, September.
    15. Margarita Debuque-Gonzales, 2013. "Empirical Determinants and Patterns of Research and Development Investment in Asia," ADB Economics Working Paper Series 364, Asian Development Bank.
    16. Asish Saha & Hock-Eam Lim & Goh-Yeok Siew, 2021. "Housing Loan Repayment Behaviour in Malaysia: An Analytical Insight," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 20(2), pages 141-159, September.
    17. Siu Kei Wong & Ling Li & Paavo Monkkonen, 2019. "How do Developers Price New Housing in a Highly Oligopolistic City?," International Real Estate Review, Global Social Science Institute, vol. 22(3), pages 307-331.
    18. Andrew Haughwout & Richard W. Peach & John Sporn & Joseph Tracy, 2012. "The Supply Side of the Housing Boom and Bust of the 2000s," NBER Chapters, in: Housing and the Financial Crisis, pages 69-104, National Bureau of Economic Research, Inc.
    19. Bing Zhu & Stanimira Milcheva, 2020. "The Pricing of Spatial Linkages in Companies’ Underlying Assets," The Journal of Real Estate Finance and Economics, Springer, vol. 61(3), pages 443-475, October.
    20. Thao Le, 2025. "Peer Sentiment and Firm Production Decisions: Evidence from Homebuilders," The Journal of Real Estate Finance and Economics, Springer, vol. 71(3), pages 510-544, October.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ire:issued:v:19:n:04:2016:p:411-434. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: IRER Graduate Assistant/Webmaster (email available below). General contact details of provider: https://www.gssinst.org/gssinst/index.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.