The Stench of Failure: How Perception Affects House Prices

47 Pages Posted: 20 Dec 2022 Last revised: 20 Mar 2023

See all articles by Kristle Romero Cortés

Kristle Romero Cortés

UNSW Australia Business School, School of Banking and Finance

Mandeep Singh

The University of Sydney - Discipline of Finance; Imperial College Business School

David H. Solomon

Boston College - Carroll School of Management

Philip E. Strahan

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 7, 2022

Abstract

In Australian real estate markets, about a third of properties are sold at auction. We show that properties that fail auctions sell later for a 2.6% discount. This effect increases for properties failing multiple auctions and when no bids are made. Consistent with a causal channel, the effect holds when auction failure is instrumented by the tendency of owners to anchor on nearby better properties (and thus set reserve prices too high). Prices cluster just below salient round numbers, and the discount fades over time, inconsistent with our effects reflecting unobserved property characteristics. We test for several mechanisms and conclude that most of the pricing discounts reflect stigma, which reduces potential buyers’ willingness to pay.

Keywords: Auctions, Property Markets, Auction Failure, Stigma

JEL Classification: D44, D10, G40

Suggested Citation

Cortés, Kristle Romero and Singh, Mandeep and Solomon, David H. and Strahan, Philip E., The Stench of Failure: How Perception Affects House Prices (December 7, 2022). UNSW Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4296494 or http://dx.doi.org/10.2139/ssrn.4296494

Kristle Romero Cortés

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Mandeep Singh

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

David H. Solomon

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Philip E. Strahan (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-6430 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www2.bc.edu/~strahan

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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