Research Of Government Land Pricing Strategy Based On Real Option Theory

Recently first-tier cities have witnessed soaring housing price, raising concerns of the whole society. Meanwhile, housing land price in the primary land market rises too fast with very high land premium. Land of "king" emerges frequently. The ministry of Land and Resources claims to stabilize the real estate market through the improvement of land supply system. In order to improve land supply system and help Chinese government better manage land market, research on the formation mechanism of land price in the primary land market will be a helpful approach. The formation of land price in the primary land market is based on the basic price decided by the government. The final land transaction price is created through transaction under certain rules. The government is the constitutor of trading rules of the primary land market and directly involved in the land transaction. The study of government land pricing is the first step to analyze the formation mechanism of land price.Firstly, the paper analyzes the characteristics of government land pricing behavior. Government is both the manager of land market and owner of land. Under the role of manager, the government’s duty is to consider the maximization of land comprehensive benefits in land pricing decision. The comprehensive benefits of land include land economic benefits, land social benefits and land ecological benefits. Under the role of land owner, government inclines to maximize land transfer fee. Those two roles interact with each other, eventually affecting the land pricing decision of government.Secondly, this paper introduces real option theory. Real option theory provides an analytical framework for land pricing. The land is a kind of physical asset. The government not only sells land use right to real estate developers, but also real option. According to real option theory, the investment in land is to some extent irreversible and extendable. The land user can make decisions according to market conditions in order to avoid market risks. As market risks get higher, the value of the right of investment choice gets higher. It means that the value of land option gets higher. And the value of land option will be displayed in land economic benefits.Thirdly, based on the characteristics of government land pricing behavior and real option theory, this paper assumes that the government has taken the land option value into account during land pricing process. In an attempt to confirm this hypothesis, the paper uses supplying data of 493 Shanghai residential lands and housing price data in 2009 to 2015 as samples. The empirical study considers the house price fluctuation ratio, which reflects market risk, as one of the factors affecting the basic land price. The empirical results show that the housing price fluctuation ratio changes with the basic land price in the same direction, proving the hypothesis. When the market uncertainty gets bigger, the land option value gets higher, the basic land price increases accordingly.Finally, this paper further explains the formation mechanism of land price. Currently listing is the main form of land transfer being used in the transfer of residential land. This kind of transfer is characterized by "the highest bidder." The introduction of this transaction model is to create a fair competition mechanism. However, in the first-tier cities, residential land is usually in short supply, it is common to find that parcel bidders fiercely compete with each other, resulting in rapid rise in land price. With increasing demand for housing, the housing price increases with the land price, which in turn increases the real estate developers’ passion to buy lands. Then the land price will get higher and higher. Rising housing prices will be harmful to people’s livelihood, greatly reducing land social benefits, which is contrary to the maximization of land comprehensive benefits included in government’s duty. Therefore, making up the defect generated in the "highest bidder" mechanism will help improve China land supply system. Results of this study also show that excessive land price increases the likelihood of idling land behavior. The real estate developers will run the risk of breaking the law and wait for the best development opportunity, pursuing more land option value in order to make up for a loss. Further results provide new thoughts for establishing a warning and forecasting system in primary land market. And the results also give favorable theoretical and empirical basis for the policy of market entering of rural profitable collective constructive land.