Reference Dependence in the Housing Market

152 Pages Posted: 14 Jun 2019 Last revised: 18 Apr 2022

See all articles by Steffen Andersen

Steffen Andersen

Copenhagen Business School - Department of Finance; CEPR

Cristian Badarinza

National University of Singapore (NUS)

Lu Liu

University of Pennsylvania - Finance Department

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: April 15, 2022

Abstract

We quantify reference dependence and loss aversion in the housing market using rich Danish administrative data. Our structural model includes loss aversion, reference dependence, financial constraints, and a sale decision, and matches key nonparametric moments, including a "hockey stick" in listing prices with nominal gains, and bunching at zero realized nominal gains. Households derive substantial utility from gains over the original house purchase price; losses affect households roughly 2.5 times more than gains. The model helps explain the positive correlation between aggregate house prices and turnover, but cannot explain visible attenuation in reference dependence when households are more financially constrained.

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 (April 15, 2022). 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

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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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