Uncertainty and new apartment price setting: A real options approach

• We model real estate development firms' price behaviour in Beijing.
• We examine real options for new apartment price setting.
• Data of large numbers of new apartment transactions are used.
• Market uncertainty affects firms' price setting behaviour.
• Government subsidies have impacts on firms' pricing behaviour.

This paper investigates real estate development firms' pricing behaviours in Beijing, China during the period 2006–2008. New apartment prices are set by real estate development firms at the presale stage with widely observed price rigidity. Home buyers are often price takers without much power of negotiation in the price setting process. We find that real estate development firms apply real options theory for new apartment price setting at the presale stage, having regard also to apartments' physical attributes, firms' financial position and other economic conditions. Our results shed lights on the nature of residential real estate development market, in particular how changes in the market uncertainty will affect firms' price setting behaviours.