Contract Rescission in the Real Estate Presale Market
57 Pages Posted: 3 Dec 2020
Date Written: November 26, 2020
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 However, in Hong Kong’s presale housing market from 1996 to 2014, over 10% of the presale contracts were rescinded, resulting in an aggregate loss of HKD 436.67 million per year.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: Suggested Citation