Price discovery function of forward contracts in the real estate market: an empirical test

Studies on the pricing of financial forward contracts are abundant, and massively outnumber those on the pricing of real forward contracts due to the scarcity of data in the real forward contracts market. In addition, most real forward contracts markets are thinly transacted and heterogeneous in nature. The property pre-sales market is a major real forward contract market in Hong Kong that has been actively transacted. The large volume of data in the Hong Kong property pre-sales market allows us to construct and test a forward contracts pricing model for properties. Despite the relative higher information cost in the real forward contracts compared to financial future contracts, we found that uncompleted properties in the pre-sales market are efficiently priced and accurately reflect the spot price level and the discount due to rental income forgone during the preoccupation period. We also found that the expected spot price derived from our forward pricing model tracks the ex post spot price closely.