Variation of Residential House Prices in Auction and Private Sales, The Case of Bole Sub-City


This study re-examines the variation in selling prices between the auction and private treaty method of sales. Using sales data from three woredas of Bole sub city over a three-year period, A hedonic pricing model is estimated. Results indicate that for house sales, auctions lead to greater selling prices across all woredas examined. However, results for unit sales reveal that this auction premium is only evident in one woreda where auctions are less prevalent. Further analysis reveals that self-selection (where a particular method of sale is selected tomaximize the selling price) is evident across the study site. After controlling for this self-selection bias using a two-stage model, houses sold via auction generally command a higher price. This suggests that the auction method of selling provides a price premium over the private treaty method of sale. In theory and general practices, a real economic growth that boosts the economic well-being of many citizens, among others, increases property buying motivation and capacity in effect. This in turn stimulates the real estate industry/market, in effect increasing supply in par with the increasing demand, ultimately resulting in a market with improved efficiency. Market system is a systematic process enabling buyers and sellers to interact. It is not just the price mechanism but the entire system of regulation, qualification, credentials reputation and clearing that surrounds the mechanism and makes it operate in social context. It is a system of coordination of human activities by interactions in the form of transaction. In the case of this study, the market system is one that is characterized by the two mechanisms of auction and traditional brokerage or private-treaty sale. Auction is a system deployed by financial institutions for distressed sells or foreclosures. The market system is also influenced by other actors and factors in the market. The main important component of open and transparent market systems is that there is competition, which serves as the main regulatory mechanism. Competition in the market can be efficient if the marketing system is open and transparent. However, due to limited and lack of transparency of information in private selling, most properties in a particular market are enforced to pass through the same set of agents. Valuation of properties and selling price are controlled by these limited set of agents. Therefore, the price at which property sold is not based on adequate information, this results a great variation of price over properties with the same character. In this framework, small shifts in information lead to significant price changes and variation.In this study gap on price the two sales mechanisms examined whether the same property sells results the same price under the two mechanisms by property type and the location. The result of the study shows negotiation to be a viable method for selling propertywhile auction provides potential buyers time to consider. Private selling method have an infinite time period, and auctions provide several other benefits like process of promoting competitive bidding, ultimately removing any price barriers, which is particularly beneficial for unusual or desirable properties which are difficult to price The dataset available in this study is significantly more comprehensive, covering sales of properties in three Woredas under Bole sub-city of Addis Ababa city over a three-year period (2014-2017) which is 32 months). As with all financial markets, real property markets experience particular trends through time. The draw conclusions are mainly based on such small samples over short time periods. The primary motivation for this study is to examine the impact that the method of sale has on selling prices. The main aim is to examine if a gap on price of asset exists between the two sales mechanisms, that is, whether the same asset sells for the same price under the two mechanisms. The relevance of this study is to examine the reason why price of property is varied under different selling method and to pop out the factors influences the price to be varied in private and auction selling and evaluate the variation of price in different selling mechanisms. Results from the above table indicate that, for residential houses sales Auction lead to greater selling price. However, results for property sales tells that this auction premium is only evident in small number of properties traded in sub cities where private are less dominant. Selling method has its own impact on price of residential houses. From the data, we can realize variation of residential houses prices in auction and private selling method. In private treaty, the property would be placed in brokers hands as exclusive agents for the agreed period of time. After controlling for several qualitative characteristics of the properties sold (using an Auction selling mechanism), we can easily examine differences between selling prices at auctions and private treaty. However, the probability of selling a property is related to the marketing system of the area. Further analysis, which controls for several factors including the size, land area, types of property, Construction materials and location of the property, reveals that properties sold via auction have up to an8.75% price superior compared to sales via private treaty.


A Thesis Submitted in Partial Fulfilment of the Requirements for the Degree of Master of Art


Variation of Residential House, auction and private treaty, Marketing System of Residential House, Residential House