Determinants of the House Bidding Process: Approximating the Seller’s Surplus?

1. Determinants of the House Bidding Process: Approximating the Seller’s Surplus? Sotirios Thanos, David Watkins, & Michael White Heriot-Watt University, Edinburgh

2. The Scottish Housing Market Context • A system of single sealed bids (usually) over the asking price • The bidding process takes place when at least two bids have been received • The seller is informed of the bids after the conclusion of the process and is not legally bound to accept highest the bid • Through this process we have information about the asking price that is not adjusted to the magnitude of the bids • The seller can at any time in the process switch to direct negotiations and/or a fixed price scheme

3. Research Questions and Definitions For the purposes of this discussion we define the BID as: BID = Selling Price – Asking Price • Is the asking price just a “marketing tool” or does it have another “economic” significance? • Are the determinants of the BID different to the asking price? Hypothesis: Asking price = f[Structural Characteristics + Neighbourhood (accessibility, environmental) characteristics + Seller’s socioeconomic characteristics + Market Conditions at the time of price setting] BID = f(Asking price + Time on the Market + Expectations of future market conditions + Buyer’s preferences towards the characteristics of the “housing services” + Bidding frequency)

4. Data and Mean Prices • The data consists of 19290 transactions in Aberdeen from ASPC • 93.16% (17970) of the properties were sold through the bidding process • 3.4% (616) of these attracted a negative BID • 6.84 % (1320) of the properties were sold at a fixed price • Socioeconomic variables were introduced at the level of census output areas (COA) and accessibility variables were calculated using GIS Table 1: Mean Selling Price

5. Model Description 3 Initial Regression Models: Model 1: Dependent variable the natural logarithm of selling price Model 2: Dependent variable the natural logarithm of asking price Model 3: Dependent variable the BID as a proportion of asking price Modelling details • Semi-log specification fitted the data best for Models 1 and 2 • White’s correction was employed to correct for the heteroscedasticity detected in the models • 69 variables were used to control for socioeconomic, accessibility, structural, submarket and temporal characteristics Goals: • To determine whether “asking price” and “proportional bid” models are different to a typical HP approach (Model 1) • Get any information about the hypotheses in the previous slide concerning the BID function

7. 2SLS Model • The asking price is endogenous to the bid, it is instrumented in the 2SLS model • The selection of the instruments is informed by Model 2 • Model 3 informed the decision of selecting independent variables for the BID model in conjunction with the standing hypothesis, namely: • Dummies for the year and quarter the sale took place • Double Glazing • Dwelling density • TOM • To test that the 2SLS model was specified correctly, a simple regression model with the same variables also was run and a Hausman Test was employed • The hypothesis that “the difference in coefficients between the two models is not systematic” was rejected at the 99% level [χ2(19)= 295.72]

9. Comparing Model Results • Comparing Tables 2 and 3: • Dwelling density coefficient is positive and highly significant for Model 4, possibly reflecting bidding frequency • Double Glazing is not significant in Model 2. The marginal effect of this variable is 4.6 times higher to the BID (Model 4) than to the selling price (Model 1) • Table 4 demonstrates the significantly higher sensitivity of BID to TOM compared to Selling Price (Model 1) and even to Model 3

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11. Discussion • The BID may depend on environmental preferences, as the double glazing variable might have indicated • As expected TOM is a strong determinant of the BID • TOM has been found in the literature to depend upon market conditions (e.g. Pryce and Gibb, 2006) • We have found that the BID is also highly dependent on market conditions, reflecting buyer expectations for future market movements • The asking price could be interpreted as a signal of the sellers reserve price to the buyer. Hence, the BID could operate as a proxy to the seller’s surplus. • Some weak evidence of a time lag by which the asking price is adjusted to previous bidding processes (witnessed by real estate agents / solicitors)

12. Further Research • Logit models to address the choice of selling method (fixed price or bidding) is one research avenue. • Stated preference experiments might also prove enlightening with regard to this question • Noise measurements will be included in the models, determining whether the purchaser’s environmental preferences are reflected in the BID • We recognise that the treatment of TOM is simplistic here and a more “state of the art” approach is the next step

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