ERES 2015

The effect of different pricing strategies in the Dutch housing marketIngrid Janssen

Roger Bougie

Koen Pillen

Istanbul, June 27th 2015

Pricing strategies in the housing sector

• The common asking price strategy is still widely applied and gives potential buyers the opportunity to negotiate below a listed asking price.

• 2014: one out of 50 transactions were based on a bottom price strategy

Introduction: trends in the Dutch housing sector

• Average Time on Market (houses sold):

• 86 days in 2007 to 176 days in 2013

• Market is recovering:

First quarter of 2015 T o M has decreased to 123 days

Source: NVM

Introduction: trends in the Dutch housing sector

Average selling price existing housing stock

Pricing strategies in the housing sector

• Bottom price strategy (best-offer-over or reserved pricing)

• Literature on the explanation of differences between listing (or asking) prices and transaction prices in different market conditions.

• Gan (2013) Australian market. Best-offer-over strategy is applied in a sellers market

• There is no evidence of the effect of this price strategy in a COLD market.

Bottom pricing in a cold market

We found that this strategy is applied in two different ways:

1. From start

2. HalfwaySwitch: if the asking price strategy does not work out

Hypothesis

The application of the bottom price strategy compared to the asking price strategy,

1. leads to lower transaction prices

2. shortens the Time on Market

“Switch” dwellings…

3. are sold for lower average prices

4. have a longer Time on Market

Method

• Hedonic regression modeling

Transaction price model

Ln VKPi = ß0 + ß1VMi + ß2Fi + ß3Li + ß3Mi +εi (1)

Time on Market model

Ln VKTi = ϕ0 + ϕ1VMi + ϕ2Fi + ϕ3Li + ϕ3Mi +εi (2)

Where:

Ln VKPi = natural logarithm of sales price of dwelling i

Ln VKTi = natural logarithm of time on market of dwelling i

VMi = price strategy for dwelling i

Fi = physical characteristics of dwelling i

Li = location characteristics of dwelling i

Mi = market circumstances when dwelling i is for sale

Data collection

Data-set

Time period January 2009 – June 2014

Total number of transactions about 500.000

“Asking price” transactions 24.583 (random sample)

“Bottom price” transactions 5.316

Data source: NVM (covers 75% of all transactions in Dutch housing market)

Results transaction price modelDependent variable Natural log transaction price

Constant 8,785*** [0,036]

Independent variables: Pricing strategy (1=asking price) -0,045*** [0,007]

Fysical characteristics (F): Market circumstances (M)Sp. M. living space (log) 0,789*** [0,008] Transaction period (ref. 2009)Type (ref. Appartment) - 2010 0,016*** [0,005]- Tussenwoning -0,003 [0,005] - 2011 0,003 [0,005]- Schakelwoning 0,096*** [0,012] - 2012 -0,060*** [0,005]- Hoekwoning 0,008 [0,006] - 2013 -0,103*** [0,005]- Helft-van-dubbel 0,088*** [0,008] - 2014 -0,072*** [0,006]- Vrijstaand 0,151*** [0,012]

Building periode (ref. before 1945) Location effects (L) Not shown- 1945-1970 -0,141*** [0,005] - 1971-1990 -0,131*** [0,005] - Na 1990 -0,003 [0,006] Sq. M. M2 parcel (ref. 0 to 200) - 200 to 500 0,126*** [0,006] - 500 to 1.000 0,268*** [0,011] - >= 1.000 0,384*** [0,014] Maintenance - Inside (1 = ‘good’) 0,121*** [0,006] - Outtside (1 = ‘good’) 0,050*** [0,007] Isolution (0 to 5) 0,013*** [0,001] Centr. heating system (1=‘yes’) 0,073*** [0,007] Number of observations 26.232 Adj. R2 0,744

ERES 2015

Effects price strategy on transaction price

The application of the bottom price strategy compared to the asking price strategy, leads to a decrease of the transaction price of ..

- 4.4%

Time on Market modelDependent variable Natural log Time on Market

Constant 2,501*** [0,119]

Independent variables: Pricing strategy (1=asking price) -0,810*** [0,027]

Fysical characteristics (F): Market circumstances (M)Sp. M. living space (log) 0,325*** [0,026] Transaction period (ref. 2009)Type (ref. Appartment) - 2010 0,091*** [0,023]- Tussenwoning -0,256*** [0,023] - 2011 0,168*** [0,024]- Schakelwoning -0,091 [0,058] - 2012 0,294*** [0,024]- Hoekwoning -0,222*** [0,030] - 2013 0,335*** [0,024]- Helft-van-dubbel -0,055 [0,036] - 2014 0,229*** [0,030]- Vrijstaand 0,284*** [0,043]

Building periode (ref. before 1945) Location effects (L) Not shown

- 1945-1970 0,080*** [0,022] - 1971-1990 0,067*** [0,022] - Na 1990 0,186*** [0,027] Sq. M. M2 parcel (ref. 0 to 200) - 200 to 500 -0,031 [0,028] - 500 to 1.000 -0,072 [0,047] - >= 1.000 -0,136*** [0,052] Maintenance - Inside (1 = ‘good’) 0,239*** [0,029] - Outtside (1 = ‘good’) -0,028 [0,033] Isolution (0 to 5) 0,013** [0,006] Cent. heating system (1= ‘yes’) 0,062** [0,031] Number of observations 26.232  Adj. R2 0,087  

ERES 2015

Effects price strategy on Time on Market

The application of the bottom price strategy compared to the asking price strategy, leads to a decrease of the Time on Market..

- 55.5%

Switch effect

• Results show that the transaction price of “switch” dwellings is 8% lower than transaction prices of dwellings that have been sold with a bottom price strategy from start.- > Not significant

• The number of “switch” transactions increased during the observed time period.

- > Sellers apply the bottom price strategy more often from start.

Regional differences in application best-offer-over strategy

% number of bottom price transactions /% total transactions

ERES 2015

Effect pricing strategy on transaction price: differences for regions

Type of region: Bottom price applied incidentally

Bottom price applied on a regular

basis

Bottom price applied

frequently

- No switch -0,095***[0,014]1 -0,025** [0,011] -0,016 [0,012]

1In regions where the bottom price strategy was applied incidentally, application of this strategy leads to higher price differences. (-9,5%, after correction: -9,0%).

Effect pricing strategy on transaction price: differences for different building periods

Building period: <1945 1945-1990 >=1990 - No switch -0,101*** [0,020] -0,046*** [0,009] 0,003 [0,010]

• The more recent the dwelling was built, the smaller the effect of the best-offer-over strategy on the transaction price.

• It seems that for younger dwellings the best-offer-price is not associated with a lower quality.

Conclusions

• Application of the bottom price strategy in a cold market leads to:– A price decrease (4.4%)– Decrease time on market (55.5%)

• This disadvantage disappears for:– In regions where the application of the bottom price is more

common– Dwellings that are built recently (> 1990)

• This research helps sellers and brokers to make more grounded decisions when choosing for a particular pricing strategy.

ERES 2015