Over-Confidence and Cycles in Real Estate Markets: Cases in Hong Kong and Asia

Authors: Ko Wang, Yuqing Zhou, Su Han Chan, and K.W. Chau

Start Page: 93
End Page: 108
Volume: 3
Issue Number: 1
Year: 2000
Publication: International Real Estate Review

Abstract: Studies on the calibration of subjective probabilities find that people tend to over-estimate the precision of their knowledge. In this paper we develop a semi-rational model and apply it to the real estate markets in Hong Kong and other Asian countries. The key point is that a person is rational about her/his private information until her/his private information is confirmed by a clearly defined market signal. Using a pre-sale as a mechanism of updating a developer's beliefs, this paper analyzes the impact of over-confidence on overbuilding and cycles in real estate markets. Our finding indicates that a pre-sale activity will increase the magnitude of over-building and over-confidence will increase the volatility in real estate markets. Our model also has implications to the well-established literature dealing with the issue of over-capacity in many industrial sectors.

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