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Buyer Exuberance and Price Premium

Department of Real Estate, National University of Singapore, 4 Architecture Drive, Singapore 117566, rstnph{at}nus.edu.sg

Seow Eng Ong

Department of Real Estate, National University of Singapore, 4 Architecture Drive, Singapore 117566, seong{at}nus.edu.sg

Yong Tu

Department of Real Estate, National University of Singapore, 4 Architecture Drive, Singapore 117566, rsttuy{at}nus.edu.sg

It has been demonstrated that the real estate market disciplines irrational price premiums. However, the persistence of price premiums begs the question of what causes price premiums in the first place. This paper seeks to examine two explanations for price premiums—the conventional information asymmetry explanation and the buyer exuberance explanation as motivated by behavioural studies. The results show that information asymmetry explains price premiums, and this finding is robust across two sub-hypotheses tested—namely, information differences arising from market familiarity and product characteristics. In addition, we find that price premiums are also caused by buyer exuberance, specifically, exuberance arising from representativeness, purchasing power and anchoring effects.

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