Contract Rescission in the Real Estate Presale Market

57 Pages Posted: 3 Dec 2020

See all articles by Quan Gan

Quan Gan

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Maggie Hu

The Chinese University of Hong Kong

Wayne Xinwei Wan

University of Cambridge - Department of Land Economy

Date Written: November 26, 2020

Abstract

Presale is a popular method for selling residential properties and an important risk-sharing instrument for both homebuyers and developers. However, in Hong Kong’s presale housing market from 1996 to 2014, over 10% of the presale contracts were rescinded, resulting in an aggregate loss of HKD 436.67 million per year. In this study, we examine the rescission of presale contracts from a novel perspective with respect to option theory. We find that the moneyness of presale contracts, defined as the market price at settlement over the contract price, is negatively associated with the contract rescission rate. Specifically, contracts that are out of the money (i.e., the market price is less than the remaining payment) at settlement have a 12.2% higher rescission rate than the average. The presale call option delta and time to maturity at the purchase time positively predict rescission, which indicates a higher rescission rate when the buyer shares more of the price and time-induced risk. The Hong Kong government’s housing market macroprudential measures lead to significantly lower rescission rates. In addition, we find that lower moneyness at settlement leads to longer holding periods after settlement, which indicates that presale option features continue to influence the buyers’ behaviour after settlement due to the disposition effect. Overall, our findings shed light on understanding the presale market mechanism, the buyers’ strategic default behaviour, and the government’s role in curbing speculation and reducing the costs induced by presale rescission.

Keywords: Presale contract, Real estate option, Presale rescission rate, Housing market regulation

JEL Classification: G12, G14, G21, H31

Suggested Citation

Gan, Quan and Hu, Maggie and Wan, Wayne Xinwei, Contract Rescission in the Real Estate Presale Market (November 26, 2020). Available at SSRN: https://ssrn.com/abstract=3738130 or http://dx.doi.org/10.2139/ssrn.3738130

Quan Gan

The University of Sydney - Discipline of Finance ( email )

Discipline of Finance
University of Sydney
Sydney, NSW 2006
Australia

HOME PAGE: http://sydney.edu.au/business/staff/quang

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Maggie Hu

The Chinese University of Hong Kong ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Hong Kong, N.T.
Hong Kong

HOME PAGE: http://sites.google.com/site/maggiehuresearch/research

Wayne Xinwei Wan (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

HOME PAGE: http://xinweiwan.weebly.com

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