The myth of property prices: on the psychology of sellers and buyers

Purpose – The purpose of this paper is to examine the behavior of buyers and sellers in making housing decision and analyses the mechanisms of the seller‐buyer interaction affecting house sale prices. Design/methodology/approach – The research methodology relies on a cross‐sectional telephone survey and the statistical analysis of housing transactions in Hong Kong. Findings – The list price is unimportant to the formation of the sale price. Rather buyer‐seller interactions affect housing prices. The list price is positively related to the number of revisions, and the size of reduction, in the list price, and the list period, but negatively related to the sale‐to‐list‐price ratio. Overpriced properties trigger larger price reductions, noticeably, in the first round of negotiation, and stay on the market longer. Short negotiation periods and time‐till‐sale, and a sale at a marginal reduction in the list price is expected by market participants and conforms with the historical sales data. Hence, market expectations are generally fulfilled and support rationality in a steady market. Research limitations/implications – There are sample size limitations, which might bias the results and weaken the generalizability. The limited housing transactions may not be representative of the population at large. Practical implications – When the market conditions are moderate, offering the property for sale at close to its current market value would determine the best possible selling price. Originality/value – Telephone surveys on home buyer‐seller interactions and critical analysis of sale records are extremely rare in Hong Kong. The paper illustrates how, in times of moderate economic conditions and housing prices, the strategic negotiation process will rationally bring the selling price close to the market value price.