Accuracy of Households’ Dwelling Valuations, Housing Demand and Mortgage Decisions: Israeli Case

Housing policy, as well as academic research, are increasingly concerned with the role of bias in subjective dwelling valuations as a proximate measure of households’ house price expectations and their relationship with housing demand. This paper contributes to this area of study by exploring the possibility of simultaneous relationships between households’ price expectations and incentive to maximise the size of housing services demanded also accounting for the supply side factors and regional perspective. The empirical estimation takes the form of a system of a two simultaneous equations model applying two stage least squares estimation technique. Cross sectional estimations utilise data extracted from the Israeli Longitudinal Panel Survey (LPS) data. Applying the best available proxy for households’ price expectations, calculated as the ratio between subjective dwelling valuations (LPS) and the estimated market value of the same properties, research has identified the interrelated factors that simultaneously influence householders’ price expectations and housing demand. Results offer conceptual and empirical advantages, highlighting the imperfect nature of the housing market, as reflected by the inseparability of bias in subjective valuations and housing decisions.