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Predicting Dwelling Prices with Consideration of the Sales Mechanism

Author

Listed:
  • David Genesove

    (Hebrew University of Jerusalem)

  • James Hansen

    (Reserve Bank of Australia)

Abstract

Using dwelling prices in Australia's two largest cities, we consider whether the way in which a property is sold, either through an auction or a private-treaty negotiation, is informative for predicting dwelling prices. We find evidence to suggest that average prices of dwellings sold at auction are informative for forecasting growth in average private-treaty prices and average sales prices overall. In contrast, we find little evidence to suggest that dwellings sold through private-treaty are similarly informative. Interpreting these results using two models of price determination – an English auction where buyer values are positively correlated, and inferred through the auction process, and a private-treaty sale where the price is determined by a Nash bargain – we find that auction prices better reflect a common trend in prices and are therefore more useful when forecasting. In contrast, private-treaty prices are affected by shocks that are specific to that mechanism of trade, such as changes in the relative strength of the bargaining positions of buyers and sellers, or changes to the dispersion of valuations. These shocks appear to reduce the usefulness of private-treaty prices for forecasting or measuring short-run movements in the common price trend.

Suggested Citation

  • David Genesove & James Hansen, 2014. "Predicting Dwelling Prices with Consideration of the Sales Mechanism," RBA Research Discussion Papers rdp2014-09, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2014-09
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    File URL: https://www.rba.gov.au/publications/rdp/2014/pdf/rdp2014-09.pdf
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    References listed on IDEAS

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    Cited by:

    1. Ellis Connolly & Gianni La Cava & Matthew Read, 2015. "Housing Prices and Entrepreneurship: Evidence for the Housing Collateral Channel in Australia," RBA Annual Conference Volume (Discontinued), in: Angus Moore & John Simon (ed.),Small Business Conditions and Finance, Reserve Bank of Australia.
    2. Alina Arefeva, 2016. "How Auctions Amplify House-Price Fluctuations," 2016 Meeting Papers 714, Society for Economic Dynamics.
    3. Paul Frijters & Benno Torgler & Christian Gillitzer & Jin Cong Wang, 2016. "Housing Wealth Effects: Cross-sectional Evidence from New Vehicle Registrations," The Economic Record, The Economic Society of Australia, vol. 92, pages 30-51, June.

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    More about this item

    Keywords

    real estate prices; auction prices; private-treaty prices;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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