Comparing ask and transaction prices in the Swiss housing market

Diego Ardila; Ahmed Ahmed; Didier Sornette; Diego Ardila; Ahmed Ahmed; Didier Sornette

doi:10.3934/QFE.2021004

Quantitative Finance and Economics

2021, Volume 5, Issue 1: 67-93. doi: 10.3934/QFE.2021004

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Research article

Comparing ask and transaction prices in the Swiss housing market

1.
Department of Management, ETH Zurich, Technology, and Economics, Zurich, Switzerland
2.
Department of Economics, University of Chicago, Chicago, USA
3.
Swiss Finance Institute, University of Geneva, Switzerland
^† The author contributed to this work during his time at ETH Zurich while being funded through the SNF grant 160305

Received: 23 November 2020 Accepted: 04 January 2021 Published: 28 January 2021
JEL Codes: C48, C58, G01, R31

We analyze the relationship between ask and transaction prices in the Swiss residential real estate market over the 2005-2015 period. First, we present strong evidence that ask and transaction prices are co-integrated across different market segments, but they do not Granger-cause one another. Second, we analyze the cross-sectional distributions of ask and transaction prices/per living space and conclude that they do not follow the same distribution, with the distribution of transaction prices close to a log normal distribution and the distribution of ask prices exhibiting slightly fatter tails. Finally, we show significant evidence that transaction prices tend to exceed ask prices during protracted booms and bubble regimes. We discuss these empirical patterns in light of theoretical housing search models, and provide support for the hypothesis that the 2005-2015 Swiss market has been dominated by an auction-like dynamics. Hence, although ask prices constitute a suitable proxy to follow the development of the Switzerland's real estate market, especially given the sparsity of available transaction data, they might be prone to underestimate the extent of price increases when the market is booming, and the magnitude of the correction when the market enters the bust phase of the housing cycle.
- ask prices,
- transaction prices,
- log normal distribution,
- co-integration,
- granger causality,
- bubbles,
- LPPLS,
- search models
Citation: Diego Ardila, Ahmed Ahmed, Didier Sornette. Comparing ask and transaction prices in the Swiss housing market[J]. Quantitative Finance and Economics, 2021, 5(1): 67-93. doi: 10.3934/QFE.2021004

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Abstract

We analyze the relationship between ask and transaction prices in the Swiss residential real estate market over the 2005-2015 period. First, we present strong evidence that ask and transaction prices are co-integrated across different market segments, but they do not Granger-cause one another. Second, we analyze the cross-sectional distributions of ask and transaction prices/per living space and conclude that they do not follow the same distribution, with the distribution of transaction prices close to a log normal distribution and the distribution of ask prices exhibiting slightly fatter tails. Finally, we show significant evidence that transaction prices tend to exceed ask prices during protracted booms and bubble regimes. We discuss these empirical patterns in light of theoretical housing search models, and provide support for the hypothesis that the 2005-2015 Swiss market has been dominated by an auction-like dynamics. Hence, although ask prices constitute a suitable proxy to follow the development of the Switzerland's real estate market, especially given the sparsity of available transaction data, they might be prone to underestimate the extent of price increases when the market is booming, and the magnitude of the correction when the market enters the bust phase of the housing cycle.

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