Reference Dependence in the Housing Market

153 Pages Posted: 4 Dec 2019 Last revised: 29 Mar 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: November 2019

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

Suggested Citation

Andersen, Steffen and Badarinza, Cristian and Liu, Lu and Marx, Julie and Ramadorai, Tarun, Reference Dependence in the Housing Market (November 2019). CEPR Discussion Paper No. DP14147, Available at SSRN: https://ssrn.com/abstract=3496636

Steffen Andersen (Contact Author)

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

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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