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

Ko Wang (), Yuqing Zhou (), Su Han Chan () and K. W. Chau ()
Additional contact information
Yuqing Zhou: Department of Finance, The Chinese University of Hong Kong, http://www.cuhk.edu.hk/
Su Han Chan: Department of Finance, California State University-Fullerton, California, USA, http://www.fullerton.edu/
K. W. Chau: Department of Real Estate and Construction, The University of Hong Kong, http://www.hku.edu/

International Real Estate Review, 2000, vol. 3, issue 1, 93-108

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.

Keywords: Market signal; over capacity; pre-sale; real estate cycle; semi-ration model (search for similar items in EconPapers)
JEL-codes: L85 (search for similar items in EconPapers)
Date: 2000
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