Game Theory in Hong Kong’s Real Estate Market
The real estate price in Hong Kong has always been a subject of controversy. The paper ‘Why housing price in Hong Kong are so high? An explanation in game theory’ simplifies the housing market in Hong Kong in abstract terms. Before we start the analysis, it would be necessary to provide some background of Hong Kong’s real estate market. Firstly, the Hong Kong government is the sole owner of land in Hong Kong. The government (the auctioneer) leases out land in a public auction, receiving a huge lumpsum premium and a relatively small amount of rent from developers (the players competing in the auction). Due to the large amount of land in each auction, the price for each auction is too large for small firms to remain competitive. As a result, there are only a small number of developers competing for the land, making the market an oligopoly. The Hong Kong government has two objectives: maximize the income received from the land auction and keep housing price affordable. The developers only have only objective: maximize profits.
The table below summarizes the game. The government and the developers are the players. DH and DL are the actual price that developers sell the real property in high and low prices respectively. GH and GL are the land prices when the government leases the land in high and low prices respectively. The model assumes GL ≤ GH≤ DL≤ DH, since developers won’t sell a property at a loss (G>D).
The payoff for developers is D-G (the price sold to the public minus the land price paid to the government). The payoff for the government is G- (L ×DH) when developers set prices high. This is because when the developers set prices high, the government would have to provide subsidy (L ×DH) for the population. The payoff for the government is G when developers set prices low, as the government wouldn’t have to provide housing subsidy. The dominated strategy for the developer would be selling high since DH– GH> DL– GH and DH– GL> DL– GL. The dominated strategy for the government would be selling high since GH– (L ×DH) > GL– (L ×DH). The Nash equilibrium would be both government and developers selling high. As a result, the housing price in Hong Kong is very high.
Source:
https://ideas.repec.org/a/ove/journl/aid9371.html