Expectation Adjustment in the Housing Market: Insights from the Scottish Auction System

This paper examines price expectation adjustment of house buyers and sellers to rapid changes in the housing market using data from Scotland where houses are sold through 'first-price sealed-bid' auctions. These auctions provide more information on market signals, incentives and the behaviour of market participants than private treaty sales. This paper therefore provides a theoretical framework for analysing revealed preference data generated from these auctions. We specifically focus on the analysis of the selling to asking price difference, the 'bid-premium'. The bid-premium is shown to be affected by expectations of future price movements, market duration and high bidding frequency. The bid-premium reflects consumer's expectations, adapting to market conditions more promptly than asking price setting behaviour and final sale prices. The volatile conditions of the recent housing market bubble are fully reflected in the bid-premium, whereas the asking and sale prices are much less prone to rapid movements.