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Can Anchoring and Loss Aversion Explain the Predictability in the Housing Market?

Author

Listed:
  • Tin Cheuk Leung

    (The Chinese University of Hong Kong)

  • Kwok Ping Tsang

    (Virginia Tech and Hong Kong Institute for Monetary Research)

Abstract

We 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.

Suggested Citation

  • Tin Cheuk Leung & Kwok Ping Tsang, 2011. "Can Anchoring and Loss Aversion Explain the Predictability in the Housing Market?," Working Papers 162011, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:162011
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    Cited by:

    1. Kuang-Liang Chang & Nan-Kuang Chen & Charles Ka Yui Leung, 2013. "In the Shadow of the U nited S tates: The International Transmission Effect of Asset Returns," Pacific Economic Review, Wiley Blackwell, vol. 18(1), pages 1-40, February.

    More about this item

    Keywords

    Housing Return Predictability; Price Dispersion; Anchoring; Loss Aversion; Hong Kong Housing Market;
    All these keywords.

    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

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