Reference Dependence in the Housing Market

145 Pages Posted: 14 Jun 2019 Last revised: 27 Jan 2021

See all articles by Steffen Andersen

Steffen Andersen

Copenhagen Business School - Department of Finance; CEPR

Cristian Badarinza

National University of Singapore (NUS)

Lu Liu

Imperial College Business School

Julie Marx

Copenhagen Business School

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: January 26, 2021

Abstract

We model listing decisions in the housing market, and structurally estimate household preference and constraint parameters using comprehensive Danish data. In the model, reference-dependent and loss-averse sellers optimize expected utility from property sales, subject to down-payment constraints, and internalize how their choices affect final outcomes. In the data, listing prices vary asymmetrically with gains and losses since purchase; this relationship is modulated by regional demand nonlinearity; and final sales bunch at zero nominal gains. We find that the price-volume correlation in housing markets is primarily driven by households' reference dependence and down-payment constraints, and only modestly by loss aversion.

Keywords: housing, mortgages, loss aversion, reference dependence, down-payment constraints

JEL Classification: D03, D12, D14, G02, G50, R21

Suggested Citation

Andersen, Steffen and Badarinza, Cristian and Liu, Lu and Marx, Julie and Ramadorai, Tarun, Reference Dependence in the Housing Market (January 26, 2021). Available at SSRN: https://ssrn.com/abstract=3396506 or http://dx.doi.org/10.2139/ssrn.3396506

Steffen Andersen

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

CEPR ( email )

London
United Kingdom

Cristian Badarinza

National University of Singapore (NUS) ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore

Lu Liu

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.imperial.ac.uk/people/l.liu16

Julie Marx

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Tarun Ramadorai (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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