Research profile: When it comes to real estate purchases, buyer beware

Assistant Professor Sanghoon Lee is doing research that is close to the hearts of Vancouverites whose real estate market has been plagued by poor quality construction.

Along with colleagues, Professors John Ries and Tsur Somerville, he has been examining the effect of a repair on pricing of older homes, and the impact of consumer knowledge when considering the purchase of these residences. Using data close from the Vancouver market, Lee analyzed information that emerged from the city’s well known leaky condo scandal to see if this well publicized event had an impact on sales, even after the units were repaired.

Dr. Lee and his team began with a theory that a repair may have a positive or negative price effect depending on the number of defective units among the population and the probability of the repair’s effectiveness. 

They supposed that if repairs have a 50 percent chance of being successful, and most condo units in the same building are not defective, a repair is viewed negatively because these units are more likely to be substandard than units with no repairs. The result is a lower price for the repaired unit. On the other hand, they theorized that if most condo units are defective, repairs are viewed in a positive light because these units are less likely to be flawed as compared to the unrepaired condos, raising their price.

To test this, Lee and his colleagues accessed data on condominium sales during the leaky condo crisis. During the time that this event was unfolding, there were two factors that made the incident appropriate for testing of their theory. Building codes had changed leading to higher rates of defective units and there was a massive surge in reports of water ingress issues as a result.

This “perfect storm” created in the housing market at that time, allowed Dr. Lee and his colleagues to test their theory and what they uncovered made for some interesting findings. 

“We established that repairs can lower prices if the number of defective units in the population is low and raise prices when the number is high,” says Lee. “Our team also believes that these results could be replicated in other markets where buyers do not have perfect information about the quality of a good and where one source of information about that item may include a repair history.”

Lee’s research has important implications for big ticket items such as cars and homes and can be applied to national and international markets alike. His work should encourage buyers and sellers to think about the type of information they divulge or gather when engaging in significant monetary transactions.

Visit Assistant Professor Lee's profile for more information about his research.