Reference Points in the Housing Market

62 Pages Posted: 14 Jun 2019

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)

Date Written: June 2, 2019

Abstract

Using comprehensive and granular Danish data, we revisit the determinants of listing and selling decisions in the housing market. Nominal losses and down-payment constraints significantly and causally affect the gap between listing prices and hedonic valuations. These determinants have interactive effects on household behavior. Reference-dependent loss aversion is most pronounced for unconstrained households, and households experiencing gains raise listing prices at higher levels of home equity, suggesting that gains affect the reference level of desired housing. Demographics also matter–older, poorer, and moderately-educated households exhibit greater reference dependence. We estimate a parsimonious and flexible model of reference points using a generalized logistic function, common in biology, to unify these facts in a tractable framework.

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

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

Suggested Citation

Andersen, Steffen and Badarinza, Cristian and Liu, Lu and Marx, Julie and Ramadorai, Tarun, Reference Points in the Housing Market (June 2, 2019). 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 )

Bukit Timah Road 469 G
Singapore, 117591
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

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