We analyse land transaction and residential development data from Beijing, China and identify that developers’ evaluation of land transaction exhibits reference dependence and loss aversion. Developers with prior land transaction losses set higher house prices than those without prior losses. This effect is strongest at the beginning and towards the end of the property sales period. It is moderated by developers’ ownership structure and listing status. Privately-owned firms experience stronger effects than their state-owned counterparts, whereas unlisted firms are more strongly affected than their listed counterparts. Results have implications on the relationship between the land and the housing markets in China. In a booming land market where land acquisition entails a high price, developers will transfer excess land price to house prices, thereby increasing the latter. The land market plays an integral role in managing housing prices in China.
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AbstractLoss aversion is a core concept in prospect theory that refers to people's asymmetric attitudes with respect to gains and losses. More specifically, losses loom larger than gains. With the capability of loss aversion to explain economic phenomena, some of which are puzzling under expected utility theory, this concept has received significant attention. This study develops a behavioral model of loss aversion to explain the development decisions by residential property developers in the People's Republic of China. Under the leasehold property right system, real estate development has two stages-first to lease land from the government, and then to develop the property according to the lease terms. This presents a unique opportunity to test the presence and effect of loss aversion in real estate development decisions. More specifically, this study determines when the land premium paid by a developer is substantially higher than the market value, whether and how this "paper loss" will affect the pricing of the housing products and development time of the project in future development. We use a sample of land and house transaction records from Beijing to test the hypothesis. This is the first study to use a semi-pa...
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