Can Anchoring and Loss Aversion Explain the Predictability in the Housing Market?
AbstractWe offer an explanation of why changes in house prices are predictable. Extending the static model in Leung and Tsang (2010), we analyze the housing market with loss averse sellers and anchoring buyers in a dynamic setting. A buyer's current offer price increases with the housing unit's previous purchase price, and the seller has the tendency to delay the sale of a housing unit that has a loss. We show that when both cognitive biases are present, changes in house prices are predicted by price dispersion and trade volume. Using a sample of housing transactions in Hong Kong from 1992 to 2006, we find that price dispersion and transaction volume are indeed powerful predictors of housing return. For forecasting both in and out of sample, the two variables perform as well as conventional predictors like real interest rate and real stock return.
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Bibliographic InfoPaper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 162011.
Length: 24 pages
Date of creation: May 2011
Date of revision:
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Housing Return Predictability; Price Dispersion; Anchoring; Loss Aversion; Hong Kong Housing Market;
Find related papers by JEL classification:
- R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-02 (All new papers)
- NEP-FOR-2011-07-02 (Forecasting)
- NEP-URE-2011-07-02 (Urban & Real Estate Economics)
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- Kuang-Liang Chang & Nan-Kuang Chen & Charles Ka Yui Leung, 2012.
"In the shadow of the United States: the international transmission effect of asset returns,"
Globalization and Monetary Policy Institute Working Paper
121, Federal Reserve Bank of Dallas.
- Chang, Kuang Liang & Chen, Nan Kuang & Leung, Charles Ka Yui, 2011. "In the Shadow of the United States: The International Transmission Effect of Asset Returns," MPRA Paper 32776, University Library of Munich, Germany.
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