Seniority purchase option in the norwegian housing market, and its effect on auction dynamics

Abstract

In our thesis, we study the effects of the presence of “forkjøpsrett”, or seniority purchase option (SPO), on the market for cooperative apartments. Norwegian housing is transacted via English auctions, and we hypothesize that the presence of SPO gives incentives for bidders to alter their behavior. The SPO gives members of a cooperative (co-op) the right to buy for-sale apartments at the price determined by the public auction without having to participate in the auction themselves. We argue that this creates an incentive for buyers with SPO to not participate in the auction, and rather exercise their SPO after the fact at a lower price than if they were to participate. Consequentially, this creates an incentive for the remaining bidders to bid more aggressively in order to deter (potential) buyers with seniority from exercising their SPO. To study this, we collect transaction level data from 2015 and 2016, containing hedonics and full bidding logs, as well as information on ownership structure. This enables us to separate between co-ops with and without SPO. As a proxy for aggressive bidding behavior, we study the occurrence of overbids. This we define as one unique bidder placing two consecutive bids, without it being as a response to bids placed by other bidders, implying that he effectively overbids himself. We also study the likelihood of an apartment being transacted via bargaining (one bidder) as opposed to an auction (more than one bidder). Results from analyzing these auction characteristics serve as evidence for our hypothesis. We show that overbidding is positively correlated with a higher sales price, controlling for observables, and that it occurs more often when SPO is present. However, SPO co-ops are more often transacted via bargaining, which has a negative effect on price, controlling for observables. Therefore, when testing the overall price effect of the SPO, we find no significant effect. The two countervailing price effects of the SPO turn out to cancel each other out. Given our result, we argue that SPO presence creates additional uncertainty for agents participating in the auction, resulting in a potentially less efficient auction format.