Analysing house prices in Potchefstroom: A microeconomic and pricing strategy approach

Abstract

In the absence of an existing valuation, homeowners have to determine the value of their property when they put it on the market. It is thus possible to identify a two-fold problem. One of the problems that homeowners face is determining their house's value, since homeowners and potential buyers value house characteristics, which are microeconomic factors, differently. Another problem is that, while the sellers need to determine an asking price, they also need to decide on an appropriate pricing strategy. The asking price can be defined as a suggested price for the property by the owner (the seller); the price the property would be advertised for. The selling price would be the price to transfer ownership of the property, agreed to by the buyer and seller. Therefore the following research questions were identified: Firstly, what are the characteristic determinants of house prices in Potchefstroom (selling price as well as asking price)? Secondly, does the pricing strategy (asking price) have an impact on the time on the market (TOM), selling price and over-priced percentage? 105 observations of sold properties between 2015 and 2017 were accumulated and used as a sample containing noteworthy data. To answer the first research question, house prices and the determining house characteristics were analysed with the support of a hedonic price model. To test the theory that house prices can be explained by house characteristics, the objective was to find specific house characteristics explaining house selling and asking prices in Potchefstroom. To answer the second research question, the relationship between the pricing strategy, derived from the house asking price, and the time on the market, selling price and over-priced percentage was tested with the support of an Ordinary Least Squares (OLS) method. The results of the hedonic price model indicated, in agreement with the literature study, that house characteristics are able to explain house prices since house characteristics indicated significance for both the asking price and the selling price. The significant characteristics for the asking price and selling price models were bedrooms, garage, plot size, a tiled roof, Baillie Park, Grimbeeck Park and Van Der Hoff Park. Furthermore, the impact of a pricing strategy was determined by using pricing strategy, where asking prices ended on a five, as an independent variable along with control variables. The dependant variables for three separate models were time on the market, selling price and over-priced percentage. The pricing strategy indicated a statistically significant relationship with the selling price and the over-priced percentage variables. The results indicate that, if a pricing strategy is implemented, a house will sell for a price closer to the asking price. The contribution of this study is, firstly, that house characteristics can be used to explain house prices in Potchefstroom with unique qualities such as high house price inflation, the academic town traits and the presence of the Army Support Base (ASB). Secondly, house characteristics do not only explain the selling price, but also explain the asking price in Potchefstroom. Thirdly, if a pricing strategy is implemented in Potchefstroom, a house would sell for a price closer to its asking price, especially if the house has one of the following qualities: situated in Baillie Park; more than three rooms; two bathrooms; a swimming pool; or more than one garage. Therefore the practical implication of this study is that these findings can be used for valuing, forecasting and investment purposes.