Validation of an Information Asymmetry Scale in the Portuguese Real Estate Market.
| Autor | Tavares, Fernando |
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Introduction
Although it is not studied much in Portugal, because of its relevance, information asymmetry has a strong impact on real estate deals. The information asymmetry in the real estate market can be defined as the difference in the level of information, such as the disparity of information about an immovable property, between the seller and the buyer. That difference in information and knowledge can derive not only from a lack of liquidity in the market but also from awareness of the physical characteristics and the quality of housing. In the real estate market, the seller usually has better and more information than the buyer.
According to Statistics Portugal (2018), since 2012 (76,398 dwellings were sold in 2012), the number of dwellings sold in Portugal has been growing and, in 2018, 178,691 dwellings were sold. Regarding 2017 (153,292 dwellings were sold), 16.6% growth occurred. The number of transactions since 2012 is greater in the category of existing dwellings, in comparison to the category of new dwellings. In 2018, 152,212 existing dwellings and 26,479 new dwellings were sold. The value of house sales in Portugal in 2018 was 24.1 billion euros (24.4% more than in 2017), which is equivalent to 12% of GDP.
The asymmetry in the real estate market may derive from the market's illiquidity, from adverse selection, from the players' reputation, and from the depreciation of real estate, which is due not only to its physical but also its functional usage, as the shape and quality of constructions are continuously changing. The buyer must obtain knowledge and information by seeking real estate promotors and companies that have a good reputation. Estate agents play a crucial role in reducing the impact of information asymmetry.
In a review of the literature about information asymmetry in the real estate market, Tavares, Moreira and Pereira (2012) categorized the studies on this topic in four subtopics: the price distortion in the real estate market, the adverse selection, the predictability of returns, and the depreciation of real estate. In recent years, the authors have addressed the asymmetry caused by the level of information. This can hail from the difference in the knowledge and information between buyers and sellers about prices, the energy efficiency of properties, their depreciation, and the participation of sellers in the business, among others.
This study aims to validate a scale to assess the information asymmetry in the Portuguese real estate market and to analyse which factors contribute most to information asymmetry. To do so, this article is structured into five parts. After this introduction, the literature review is presented. In the third part, the methodology is shown, describing the collected sample, the data collection instruments, and the statistical procedures. The fourth part presents the results, and last but not least, in the fifth part, the conclusions of the work are laid out.
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Literature Review
As Ben-Shahar and Golan (2019) understand, the finer the available information, the better for buyers and sellers, and the markets that most benefit from that are those where the levels of education, income, and socioeconomic conditions are lower.
Canepa and Chini (2016) mention that during expansion periods, house prices increase exponentially, and during contraction periods, they decrease logarithmically. Therefore, contractions occur for longer periods than expansions. After the subprime global financial crisis, there was a growing consensus that the real estate sector played a stabilizing role in the economy.
Wang et al. (2020) conclude that, in China, the volatility of house prices derives from the impact of monetary policies. An optimistic macro-analysis leads to positive house price volatility and that volatility tends to increase with political uncertainty. Thus, the authors conclude that when political uncertainty is high, the macro-environmental impact on house prices is also high. Also regarding prices, Andre, Gupta and Mwamba (2019) conclude that various reasons may explain house price asymmetry, including the non-linearity of its determinants and behavioural responses, in particular those attached to the value of constructions and aversion to losses.
The authors Wit and Klaauw (2013) show that reductions in the price list significantly increase the risk of selling, possibly with substantial losses. In a market with information asymmetry, the signals of abrupt drops in prices do not add any information.
According to Cheng, Liu and Liu (2019), house prices often have restrictions, so when studying prices, one must take into consideration whether there was pressure to sell the property, what the planned deadline to sell was, and what the main reasons for the definition of the deadline to sell were. Puy, Ary and Shi (2020) discovered that house prices increased more disproportionately in the neighbourhoods (in the USA) with a high concentration of populations from countries in crisis, which the authors interpret as (indirect) evidence of the effect on local house prices caused by foreign buyers.
Levy, Bentham and Cheung (2020) conclude that the framing effects in the real estate market are asymmetric and that asymmetry is a result of familiarity with the market. The study's results show that pessimistic framing leads buyers to forecast sharp drops in house prices, whereas optimistic framing leads buyers to predict a short increase in prices. This study reveals that downturns in the real estate market can be sharpened and extended if there is a pessimistic perspective in the markets. The framing effects in the market's ups and downs are clear, and such effects can lead to asymmetric house price movements. Pessimistic or optimistic framing by individuals regarding house prices reflects their aversion to loss. On the other hand, pessimistic or optimistic framing by individuals will be exaggerated by the limited rationality of house buyers.
Feelings are an important factor in the decision to buy or to sell a dwelling, according to Saydometov, Sabherwal and Aroul (2020). The authors built an index of feelings based on Google Trends and observed that an increase in negative feelings about the next month predicts a drop in the return of the housing index in the next month. They also found evidence that the sentiment index has a forecasting ability of up to 3 months.
For Cheng, Lin and Liu (2019), there is a fundamental difference between real estate and financial assets. In the real estate market, the transaction price is a function of the property's value and the seller's influence, whereas in the financial market the prices are believed to capture all the information related to the value. This observation by itself reveals the existence of information asymmetry. Their study reveals that, due to the heterogeneity of sellers and to their restrictions and personal preferences, prices can be heavily distorted. They also highlight that when sales prices are identical for different properties, this reveals differences between sellers.
2.1. Quality of construction, utilization, and location of housing
Quality of construction was studied by Ben-Shahar and Golan (2019), who believed that house prices vary depending on the quality of construction. In a study about information asymmetry, Kurlat and Stroebel (2015) conclude that, in the real estate market, sellers are better informed about the real value of the assets than buyers, to which is added the possibility of information heterogeneity between buyers and sellers. There are more informed sellers with a bigger offer, more price elasticity, and a greater capability to forecast future prices. The authors understand that better-informed buyers buy houses that rise in value, because the buyers, as the owners of the houses, have more information on important characteristics of the neighbourhood, and that is an important aspect regarding asymmetry. Also, Levitt and Syverson (2008) concluded that the estate agent is better informed than the buyer about transaction values and the market situation. When an estate agent sells his/ her own house, it is more expensive and has been on the market for more than ten days on average; that is, sellers sometimes induce their clients into selling too fast at a lower price.
In his study about manipulation by estate agents, Hong (2020) verified that the properties of agents have a higher price than the general price listings and that estate agents manipulate clients when they present those house listings. Hong (2020) concluded that manipulation in the presentation of dwellings explains 70% of the difference in the sale price premium between properties in general and the properties of agents. The author suggests that agents must be disciplined to avoid these situations, so that price listings can be more serious. The author mentions that removing this kind of manipulation by agents can lead to an increase in the premiums of estate agents and the minimum level of effort on their part to improve the available information on properties.
The authors Aydin, Brounen and Kok (2018) investigated how private investors capitalize on energy efficiency in the real estate market, and the impact of the emission of an energy performance certificate. For the authors, most of the literature on the capitalization of energy efficiency in the real estate market suffers from a disadvantage, which is the potential bias that results from not mentioning the unobservable housing characteristics with the energy efficiency measurements. The results of the study of Aydin, Brounen and Kok (2018) indicate that energy efficiency is capitalized on in the prices of immovable properties. In their study, the authors documented that for the Dutch market, if the energy requirements of a house are reduced by 10%, the price of that house rises by approximately 2.2%. Their study also states that there is a bigger...
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