Using the data of the 2,354 cases for court-foreclosed houses and 1,546 cases for the brokerage houses in Taipei from 2001-2002, we hypothesize two key factors to answer “Does the factor of competition explain more price discount?”:
(1) the housing physical quality (which is the control variable in this paper); (2) the market mechanism: this construct can be separated into two dimensions further. One is the risk premium for the court-foreclosed houses (where risk is proxy “handover or not” and “vacant or not”). The brokerage houses are dealt by the broker searching, and usually have less risk involved because of features of
“vacancy and handover”. Another is the competition (which is proxy the number of bidding). We argue the united-price will be driven by the increasing of full-competition in the foreclosed cases, even if the physical quality is controlled at the same features.
Through statistical analysis and the econometric modeling of logistic regression, three main empirical results are found: (1) The average price for the foreclosed houses in the biding market is lower 17.20% than that for the brokerage houses in the searching and bargaining market, controlling other things being equal. We propose the market mechanism such as the foreclosed-housing risk of the buyer exposure, and the participant number of biding can explains more for the deep-discount price. (2) The price discount is 15.99% if one bidder
involves. Moreover, the more participant number of biding is, the lower price discount between auction market and search market is. This implies that full information disclosure can increase the competition and reduce the price discount of foreclosed houses in the court-oriented auction market. In other words, along with the increasing to the bidding number, the rate of market differential prices would be reduced to a marginal slope in the curved pattern of nonlinear approximation, then close to price of search market.
Comparing with the empirical results of previous literature, we argue the
“discount” phenomenon is not a necessity generated by the foreclosed “bidding auction” system. For example of foreign real estate auction markets, the higher prices by auction also can be achieved, owing to higher competition, more transplant and sufficient information disclosure, lower transaction costs, et al.
Our empirical results have some implication to the improvement of foreclosed house auction system in Taiwan: as far as the policy-markers are concerned, the authority can create a full information disclosure system, reducing transaction risk, and enhancing the market competition. The data indicates that a deal by auction actually required the three auction times. The inefficiency of auctions shows the policy markers who must pay more attention about the decision of reserve price.
As far as the investors of court-foreclosed houses are concerned, their investment patterns are in the pursuit of “high-risk, high-reward”. They believe the return of foreclosed housing market is higher, however they always ignore the uncertain risk of foreclosed housing market will cause the significant loss19. Furthermore, our findings suggest that, under housing quality control, the
19 The risk of foreclosed houses is not only in property rights, but also in the fact that houses may be be occupied by the former owner or any other person, who may also demand removal cost and other additional costs even though it is a “handover house”. Therefore, their expectation reward/risk = loss probability * loss price. For example, after winning a handover residence, its market price is 500 million, and its winning bid is 400 million dollars. On the surface, it seems to be discounted by 20%, and have earned 100 million; however, the case may require additional costs to be paid, such as removal costs because of being occupied, taxes, and housing costs that the former owner owed, or the winning bidder has to face the house being vandalized. So, the payment of ownership and of complete housing conditions may be more than its earning. If the winning bidder is unable to obtain ownership, or the house is destroyed, then that is all part of its losses. In addition, the spiritual and time wasting problems of dealing with foreclosed houses are incalculable.
differential price of foreclosure and search market is 17.20%, less than 20%.
Although, the price of foreclosed house is cheaper than the price of search market, however, the discount is below 30%20, which is not as general expected.
20 According to the information, it is shown that, from the successful foreclosed housing auction information in Taipei, from 2001 to 2002, the ratio of winning bids and reserve price is 69.7%, and its discount is about 30%.
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Appendix 1: The Auction Process of Foreclosed House and Setting