Bad Loans and the Role of Minimum Prices in Real Estate Auctions

An Empirical Analysis from Osaka

Abstract

This paper presents how bad loans were recovered by real estate auctions using thecondominium data from Osaka district court in 1997-2000. The empirical analysis found that more than 70 percent of all condominiumwas sold and the ratio of recovered loans reached 70 percent on average, but that of loans related to specialcommercial trades was extremely low. The 1998 law amendments lowered sold prices on average, but anincreased sold rate may have augmented the “expected ratio of loans to be recovered.” The minimum prices setby the count were found four times higher than the highest bidding prices in 1997. Since the lenders receiveddamages by such inappropriate minimum prices, minimum prices should be used as “reference” to giveexogenous and reliable information to possible bidders.