Can Anchoring and Loss Aversion Explain the Predictability in the Housing Market?
Kwok Ping Tsang
Virginia Polytechnic Institute & State University
Tin Cheuk Leung
Chinese University of Hong Kong (CUHK)
January 21, 2011
We offer an explanation of why changes of house price are predictable. Extending the static model in Leung and Tsang (2010), we analyze the housing market with loss averse sellers and anchoring buyers in a dynamic setting. Buyer’s current offer price increases with the housing unit’s previous purchase price, and seller has the tendency to delay sale of a housing unit that has a loss. We show that when both cognitive biases are present, changes in house price are predicted by price dispersion and trade volume. Using a sample of housing transactions in Hong Kong from 1992 to 2006, we find that price dispersion and transaction volume are indeed powerful predictors of housing return. For forecasting both in and out of sample, the two variables perform as well as conventional predictors like real interest rate and real stock return.
Number of Pages in PDF File: 28
Keywords: Housing Return Predictability, Price Dispersion, Anchoring, Loss Aversion, Hong Kong Housing Market
JEL Classification: R31, C53, D03working papers series
Date posted: January 25, 2011 ; Last revised: July 20, 2011
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