List prices in Icelandic residential property sales - A strategic tool for achieving higher sales price or shorter time-on-market?

Abstract: In recent years, Iceland has experienced a growing demand for residential housing and the average square-meter price for apartments and single-family homes in the Capital Region has almost doubled between 2010 and 2019. Property sales in Iceland are most commonly intermediated by real estate brokers and the sales process stands in contrast to other Nordic countries, since it involves a bidding procedure with sealed, or secret, bids. In a property auction with sealed bids, the announced list price becomes a particularly important piece of information for buyers as the offers remain secret and are unobservable to other bidding participants as the auction progresses. This study seeks to address list prices’ impact on the final sales price as well as the length of sale in Icelandic housing transactions. We also study the standard practice of list price determination among Icelandic real estate brokers and investigate how their pricing strategies influences the outcome of a sale. The following two hypotheses were formulated: (1) A list price below a property's market value leads to lower sale prices, (2) A list price below a property's market value leads to shorter time-on-market. These hypotheses were formulated based on observations in existing research. Based on our hypotheses, we conducted a regression analysis based on two different empirical approaches using a comprehensive collection of residential transaction data collected from HMS, Iceland. The data set contained 56 818 transactions of apartments and single-family houses (semi-detached and detached) sold in the Capital Region of Iceland over the period January 2014 to August 2020. Furthermore, we sent out a survey to members of the Association of Real Estate Agents in Iceland, to gain deeper understanding of how Icelandic brokers determines list prices. The results show that both hypothesis 1 and 2 receive support and thus, we found that a list price below the property’s value leads to a lower sale price and shorter time on the market, respectively. This result indicates that there is a trade-off between sales price and the length of a sale. Conversely, there is a positive correlation between a list price above the property’s market value and a higher sale price as well as longer time on market. From the survey results, we found that the standard pricing strategy among these brokers is to list objects at, or slightly higher than the market value of the property. In turn, we could conclude that the brokers adopt the pricing strategy that results in higher prices at the expense of time on the market, which becomes elongated.