Effect of Housing Supply
Control Strategy
Huang, Yi Kun
Wang, Xiao Cen
Chau, Kwong Wing
The University of Hong Kong
McGill University
The University of Hong Kong
1
Introduction
• Control of housing supply is a possible strategy for
real estate developers.
• Is this strategy available? How does it work? Any
evidence?
2
Introduction
• The fundament of our research is the demand and supply
in Neoclassical Economics.
• Demand Side
Demand of houses can be divided as consumption need and investment need.
Investment needs normally increase in house price rising market, thus can be seemed as
a general form of speculation. (Malpezzi and Wachter, 2002)
• Supply Side
Oligopoly: a few powerful developers in this market, and they can easily control the
housing supply
3
Literature Review
• 1) Oligopoly in Real Estate
•
•
•
Real estate developers often operate in oligopolistic environment in reality (Ong, et
al, 2003)
Grenadier (2005) also used a special case of the option exercise game framework to
explore a continuous-time Nash Equilibrium which bases on oligopolistic real
estate market.
Wu and Li (2007) also points out that the market structure can cause the supply to
be controlled by a few powerful developers that may manipulate the supply of
houses.
• 2) Supply control
•
•
Objective reasons: land use restriction; environmental regulation
Subjective reasons: profit, enterprise strategy
4
• 3) Speculative demand
Many researchers have observed that speculation in land or in real estate market is
prime factor that drives house price cycle. (Atterhog, 1995; Feagin, 1982; Malpezzi
& Wachter, 2002)
Phenomenon: higher demand accompanies with increasing house price.
5
Model Development
• Assumptions I: Normal consumption demand exists
before the supply control strategy; and the speculative
demand is 0 this time. When supply of houses was control
to a sufficiently low level, speculative demand will be
aroused. ( Q  Qcont )
• Assumption II: Normal consumption demand will not
be affected by supply control strategy. That means the
demand curve of this customers group will not shift after
the supply control.
6
• Without Supply Control
•
Reversive Demand Function:
a1 1
P   Qncd
b1 b1
a1
1 2
TR  Qncd  Qncd
b1
b1
•
Total Revenue:
•
Total Cost:
•
a1 a1 c * b1
1 a1 c * b1 2
a1 c * b1
*


(

)

(

)

FC

c

(

)
1
Maximum Profit:
b1 2
2
b1 2
2
2
2
TC  FC  c  Q
7
• Under Supply Control
Qsd  a2  b2 P
when 0  Q  Qcont
•
Speculative Demand:
•
Total Demand:
Q  Qncd  Qsd  (a1  a2 )  (b1  b2 ) P
Profit Function:
a1  a2
Q2
2  (
Q
)  ( FC  c  Q)
b1  b2
b1  b2
•
• Inequalities System for supply control Strategy:

a1  a2
Q2
Q
)  ( FC  c  Q)  1*
 2  (

b1  b2
b1  b2

0  Q  Qcont
8
• Condition for supply control strategy
(Inequalities system has solution)
• [
(c 
a1  a2
a a
4
)  ( 1 2  c) 2 
(1*  FC )
b1  b2
b1  b2
b1  b2
2
b1  b2
,
(c 
a1  a2
a  a2
4
) ( 1
 c) 2 
(1*  FC )
b1  b2
b1  b2
b1  b2
2
b1  b2
]
[0, Qcont ]  
• The left hand side is the Control Interval.
• this condition can also be expressed as:
(c 
a1  a2
a  a2
4
) ( 1
 c) 2 
(1*  FC )
b1  b2
b1  b2
b1  b2
0
2
b1  b2
(c 
and
a1  a2
a  a2
4
) ( 1
 c) 2 
(1*  FC )
b1  b2
b1  b2
b1  b2
 Qcont
2
b1  b2
.
9
Marginal Inequality for Optimization
• Assumption
(Completely Raised
Demand): after applying
supply control, new demand
of houses merely shift
upward in first quadrant
(including Q-axis and P-axis).
• Equivalent:
Qncd  Qsd  (a1  a2 )  (b1  b2 ) P  Qncd
10
Empirical Study for Supply Control
Strategy
• The mechanism of supply control strategy is that housing
developers provide a supply control signal (for both subjective
and objective reasons) to arouse speculative demand; and
achieve higher profit.
• The housing market data of Hong Kong were collected from
Census and Statistics Department of Hong Kong for empirical
study.
•
•
•
Housing Supply: # of newly completed private residential buildings
House Price: House price index (benchmark at 1999)
Developers Profit: Gross Domestic Capital Value (at current market price) from
private building and construction sector
11
Period for Supply Control: 1984 to 1997 (The Sino-British Joint Declaration)
12
• Model:
Vector autoregressive (VAR) regression for exploring the
dynamic relation.
Yt    1Yt 1   2Yt 2  ...   k Yt k  et
• Criterion for Model Selection:
AICc for relatively small sample size
2k (k  1)
AICc  AIC 
n  k 1
Selection result: k=1 for VAR model.
13
• Effect of Supply Control Strategy
Yt     1Yt 1  D   2Yt 1  et
1 t  [1984,1997]
With D  
0 t  [1984,1997]
• Null Hypothesis:
H 01 :  HS ,1   HS ,0 (  HS,i
is the coefficient for HS in PRO
equation when D= i )
14
• Result for VAR
Null Hypothesis has been rejected.
15
Summary and Conclusion
• 1) In this paper, we explore the mechanism of supply
control strategy and set up a model to explain it. By
analyzing the profit change, we found out the
Conditions for supply control strategy and the
Interval of it.
• 2) Under the assumption of Completely Raised
Demand, we also prove the marginal inequality when
real estate developers maximize their porfits.
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• 3) By applying VAR model, we used the data of
Hong Kong from 1979 to 2008 to verify that
supply control strategy can successfully help
developers achieve excessive profit.
Thank you!
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