Transaction Volume and Price Dispersion in the Presale and Spot Real Estate Market - Implications for Construction of Repeat Sales Price Indices

Noise trading has been intensively studied in finance, but rarely in real estate. Theories of price dispersion have also been well established in retailing research, but rarely in real estate. This paper is probably the first attempt to study the effect of noise trading on the price dispersions in the presale and spot housing market in Hong Kong. Quality-controlled price dispersion data series are estimated using a sample of data in the housing presale and spot market in Hong Kong. The results show transaction volume has negative and significant effect on price dispersion in spot market. The volume effect is however negative and significant in the presale market. The results support our theoretical prediction that there are more noise traders in the presale market due to lower transaction costs. The volume effect provides support for a volume weighted least squares repeat sales index