Multiple Reference Points and Length of Ownership in the Housing Market

60 Pages Posted: 25 Feb 2021

See all articles by Naqun Huang

Naqun Huang

Institute of Urban Development, Nanjing Audit University

Jaimie W. Lien

The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics

Jie Zheng

Tsinghua University - School of Economics & Management

Date Written: February 23, 2021

Abstract

Reference-dependent utility has been shown to have a significant influence on housing market activity. Sellers facing a nominal loss on their home due to market conditions, tend to inflate the asking price and thus the transaction price of their home, indicative of loss aversion. However, the original purchase price of a home may lose influence as a reference-point as the period of ownership increases, while homeowners rely increasingly on other benchmarks such as neighboring homes’ sales prices as reference points. In other words, a homeowner may have multiple reference points in their underlying utility function, whose relative influences shift in importance over time. We use comprehensive administrative data on residential real estate transactions in Singapore’s private housing market to test the influences of original purchase price and recent neighborhood price as reference points over the length of homeownership. Purchase price and neighborhood price are each valid reference points based on established empirical methods in the behavioral and housing economics literature. By testing for their relative influences as a function of length of ownership, we find that prior purchase price is more influential for the first years of ownership, while neighborhood price becomes more influential during the subsequent holding years. Finally, we provide a theoretical framework for understanding the relative influences of multiple reference points over time, which supports the empirical findings.

Keywords: reference-dependence, multiple reference points, housing market, length of ownership

JEL Classification: D03, D81, R31, R32

Suggested Citation

Huang, Naqun and Lien, Jaimie W. and Zheng, Jie, Multiple Reference Points and Length of Ownership in the Housing Market (February 23, 2021). Available at SSRN: https://ssrn.com/abstract=3791283 or http://dx.doi.org/10.2139/ssrn.3791283

Naqun Huang

Institute of Urban Development, Nanjing Audit University ( email )

86 Yushan W Rd
Pukou, Jiangsu 210017
China

Jaimie W. Lien (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics ( email )

Shatin, N.T.
Hong Kong

Jie Zheng

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

HOME PAGE: http://jzheng.weebly.com/

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