Information transparency and pricing strategy in the Scottish housing market

• DOI: https://doi.org/10.1108/IJHMA-11-2020-0140
• Published date: 07 June 2021
• Date: 07 June 2021
• Pages: 429-450
• Subject Matter: Property management & built environment,Real estate & property,Housing markets
• Author: Daniel Lo,Nan Liu,Michael James McCord,Martin Haran

Information transparency and

pricing strategy in the Scottish

housing market

Daniel Lo

Belfast School of Architecture and the Built Environment,

Ulster University, Newtownabbey, UK

Nan Liu

Centre for Real Estate Research, Business School,

Aberdeen University, Aberdeen, UK, and

Michael James McCord and Martin Haran

Belfast School of Architecture and the Built Environment,

Ulster University, Newtownabbey, UK

Abstract

Purpose –Information transparencyis crucially important in price setting in realestate, particularly when

information asymmetry is concerned. This paper aims to examine how a change in government policy in

relation to information disclosureand transparency impacts residential real estate price discovery.Specially,

this paper investigateshow real estate traders determinedasking prices in the context of the Scottish housing

market before and after the implementation of the Home Report, which aimed to prevent artif‌icially low

asking prices.

Design/methodology/approach –This paper uses spatial lag hedonic pricing models to empirically

observe how residential asking prices are determined by property sellers in response to a change in

government policy that is designedto enhance market transparency. It uses over 79,000 transactiondata of

the Aberdeenresidential market for the period of Q2 1998 to Q2 2013 to test the models.

Findings –The empirical f‌indingsprovide some novel insights in relation to the price determinationwithin

the residential market in Scotland. The spatial lag models suggest that spatial autocorrelation in property

prices has increased since the Home Report came into effect, indicating that property sellers have become

more prone to infer asking prices based on prior sales of dwellings in close vicinity. The once-common

practiceof setting artif‌icially low asking prices seems to have dwindledto a certain extent statistically.

Originality/value –The importance of understandingthe relationship between information transparency

and property price determination has gathered momentum over the past decade. Although spatial hedonic

techniques have been extensivelyused to study the impact of various property- and neighbourhood-specif‌ic

attributes on residential real estate market in general, surprisingly little is known about the empirical

relationshipbetween spatial autocorrelationin real estate prices and information transparency.

Keywords Real estate, Housing prices, Housing market analysis, Housing policy, Pricing model,

Spatial residential

Paper type Research paper

1. Introduction

Pricing strategy has been an important concept in both theoretical and empirical modelling

of housing transactions which is envisaged to impact upon the number of bids, f‌inal

transaction price and the length of time to sella home (Kang and Gardner, 1989;Yavas and

Yang, 1995;Forgey et al.,1996;Arnold, 1999;Anglin et al., 2003;Pryce, 2011;Thanos and

Scottish

housing

market

429

Received25 November 2020

Revised21 March 2021

Accepted22 March 2021

InternationalJournal of Housing

Marketsand Analysis

Vol.15 No. 2, 2022

pp. 429-450

© Emerald Publishing Limited

1753-8270

DOI 10.1108/IJHMA-11-2020-0140

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1753-8270.htm

White, 2014). Equally, the evaluation of asking prices is also important in the valuation

process, where estimated market value is derived from recentlytransacted comparable sale

prices. As such, bias in the asking prices of comparable properties can distort the market

value estimate of the subject property,which in turn could lead to a divergence between the

market value estimateand the sale price (Rabianski,1992).

It is widely accepted that there is a degree of information asymmetry in most housing

markets between sellers and buyers. This occurs when sellers and their agents have better

knowledge of a property’s qualities and location, whereas buyers are perceived to be less

well informed (Lin and Vandell, 2007;Pope, 2008;Wonget al.,2012;Nanda and Ross, 2012).

This effect of the improvement in informationsymmetry has been examined by a number of

studies (Pope, 2008;Nanda and Ross, 2012).Whilst numerous studies have investigated the

impact of the introduction of propertycondition disclosure regulations on the selling prices,

more limited analysis has been undertaken to examine the potential changes in the pricing

strategy of the sellers.

In Scotland, the improvement in information transparency on housing transactions was

also enforced by regulations. The Home Report scheme was introduced in December 2008,

requiring the seller of a residential property to provide a Single Survey, an Energy Report

and a questionnaire when listing the property on the market. The Scottish government

introduced the scheme with three main objectives: to improve information about a

property’s condition, to address the cost and eff‌iciency issue associated with multiple

valuations and surveys and to address the problems created by the practice of setting

artif‌icially low asking prices (Black et al., 2015). Indeed, this artif‌icial setting of low asking

prices [1] has traditionally been common practice in Scotland, especially during periods of

market upturns and sustained growth. This approach whilst benef‌itting sellers from the

uncertainty and competition among potential buyers, has been heavily and publicly

criticised for leading people, who cannot afford the property, paying for surveys to be

undertaken. Consequently, to evaluate the extent to which the scheme met the initial

objectives, the Scottish government carried out a f‌ive-year review in 2014. The f‌indings

emanating from the review illustrated that, on f‌irst showing, the scheme appeared to be

successful, nonetheless, when specif‌ically addressing the issue relating to the setting

artif‌icially low asking prices,the government’s review was far less conclusive onhow much

this is because of poorermarket conditions.

Accordingly, this paper attempts to complement the government review and provide

some additional evidence as to the evaluation of potential changes in pricing strategy as a

result of the implementation of the Home Report scheme. In this regard, we examine the

potential changes in the relationshipbetween asking and seller’s perceived reservation price

and further explore the explanations for such changes using auctiontheories relative to the

Scottish sealed bid context. Using housingtransaction data pre and post the introduction of

the Home Report, we empirically test whether there has been a signif‌icant statistical

difference in asking price relativeto the “value”of the property since the introduction of the

scheme. It is believed that a better empirical understanding and conceptualisation of the

underpinning price determinationprocess and dynamics of the real estate market, as well as

the effect of government policy on market transparency is of crucial signif‌icance from the

viewpoints of buyers, sellers and other stakeholders. It is further posited that the study

should carry implications in relation to the effectiveness of government interventions to

tackle problems arising from information asymmetry in real estate pricingand enhance the

overall equitabilityof the real estate investment environment for market participants.

The remainder of the paper is structured as follows. Section2 discusses the background

of the Scottish housing market and the rationale for the enactment of the Home Report

IJHMA

15,2

430