Reference Dependence in the Housing Market

Abstract

We quantify reference dependence and loss aversion in the housing market, using a structural model of the house selling decision estimated on rich Danish administrative data. Households derive substantial utility from gains and losses over the original house purchase price, with losses affecting households 2 to 2.5 times more than gains. The model shows that reference dependence and loss aversion, in combination with household responses to mortgage down-payment constraints can help to explain the positive correlation between aggregate house prices and turnover. The model cannot fully explain the new empirical observation that reference-dependence appears attenuated when households are more financially constrained.

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

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