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Anchoring and Loss Aversion in the Housing Market: Implications on Price Dynamics

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  • Tin Cheuk Leung

    (The Chinese University of Hong Kong)

  • Kwok Ping Tsang

    (Virginia Tech and Hong Kong Institute for Monetary Research)

Abstract

In this paper we develop a simple model with anchoring and loss aversion to explain house price dynamics. We have two testable implications: 1) when both cognitive biases are present, price dispersion and trade volume are pro-cyclical; 2) if anchoring decreases with time, then price dispersion and trade volume are higher for transactions whose previous purchase is more recent. Using a dataset that contains most real estate transactions in Hong Kong from 1992 to 2006, we find strong and significant anchoring and loss aversion which are robust to type of housing and sample period. The finding is consistent with the strong correlation between house price, price dispersion, and volume in the data. Moreover, anchoring decreases with time since previous transaction, and both price dispersion and volume show the same pattern. Our results suggest that anchoring and loss aversion can induce cyclicality in house prices.

Suggested Citation

  • Tin Cheuk Leung & Kwok Ping Tsang, 2011. "Anchoring and Loss Aversion in the Housing Market: Implications on Price Dynamics," Working Papers 282011, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:282011
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    References listed on IDEAS

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    Cited by:

    1. Greenaway-McGrevy, Ryan & Sorensen, Kade, 2021. "A Time-Varying Hedonic Approach to quantifying the effects of loss aversion on house prices," Economic Modelling, Elsevier, vol. 99(C).
    2. Lamorgese, Andrea R. & Pellegrino, Dario, 2022. "Loss aversion in housing appraisal: Evidence from Italian homeowners," Journal of Housing Economics, Elsevier, vol. 56(C).
    3. Akkoyun, H. Cagri & Arslan, Yavuz & Kanik, Birol, 2013. "Housing prices and transaction volume," Journal of Housing Economics, Elsevier, vol. 22(2), pages 119-134.
    4. 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.
    5. Jing Wu & Yongheng Deng & Hongyu Liu, 2014. "House Price Index Construction in the Nascent Housing Market: The Case of China," The Journal of Real Estate Finance and Economics, Springer, vol. 48(3), pages 522-545, April.
    6. Bian, Timothy Yang & Huang, Jun & Zhe, Siqi & Zhang, Man, 2021. "Anchoring effects in the Chinese art market," Finance Research Letters, Elsevier, vol. 43(C).
    7. Robert Oxoby & William G. Morrison, "undated". "Asset Integration, Risk Taking and Loss Aversion in the Laboratory," Working Papers 2019-04, Department of Economics, University of Calgary, revised 30 Jan 2019.
    8. Geoffrey Gikonyo Gitau & David N. Kiragu & Riro Kamau, 2018. "Effect of Heuristic Factors and Real Estate Investment in Embu County, Kenya," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 8(4), pages 30-38, October.
    9. Peyman Khezr & Shabbir Ahmad, 2018. "Anchoring in the Housing Market: Evidence from Sydney," Discussion Papers Series 596, School of Economics, University of Queensland, Australia.
    10. Charles Ka Yui Leung & Tin Cheuk Leung & Kwok Ping Tsang, 2015. "Tax-driven Bunching of Housing Market Transactions: The Case of Hong Kong," International Real Estate Review, Global Social Science Institute, vol. 18(4), pages 473-501.
    11. Andrea Lamorgese & Dario Pellegrino, 2019. "Loss aversion in housing price appraisals among Italian homeowners," Temi di discussione (Economic working papers) 1248, Bank of Italy, Economic Research and International Relations Area.
    12. Fan, Ying, 2022. "Demand shocks and price stickiness in housing market dynamics," Economic Modelling, Elsevier, vol. 110(C).
    13. Helen Bao & Chunming Meng, 2017. "Loss Aversion and Residential Property Development Decisions in China: A Semi-Parametric Estimation," ERES eres2017_156, European Real Estate Society (ERES).
    14. Liu, Hsing & Liao, Chi-Yo & Ko, Jing-Yuan & Lih, Jiann-Shing, 2017. "Anchoring effect on first passage process in Taiwan financial market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 477(C), pages 114-127.
    15. Bao, Helen X. H. & Meng, Charlotte Chunming, 2017. "Loss Aversion and Residential Property Development Decisions in the People’s Republic of China: A Semi-Parametric Estimation," ADBI Working Papers 640, Asian Development Bank Institute.
    16. Shi, Song & Yang, Zan & Tripe, David & Zhang, Huan, 2015. "Uncertainty and new apartment price setting: A real options approach," Pacific-Basin Finance Journal, Elsevier, vol. 35(PB), pages 574-591.
    17. Ying-Hui Chiang & Yuan Ku & Feng Liu & Chin-Oh Chang, 2019. "House Price Dispersion in Taipei Residential Communities," International Real Estate Review, Global Social Science Institute, vol. 22(1), pages 109-129.
    18. William Morrison, Robert Oxoby, 2016. "Risk Taking, Intertemporal Choice, and Loss Aversion," LCERPA Working Papers 0096, Laurier Centre for Economic Research and Policy Analysis, revised 01 Jul 2016.
    19. L. Li & Helen X. H. Bao & K. W. Chau, 2023. "On the Strategic Timing of Sales by Real Estate Developers: To Wait or To Presell?," The Journal of Real Estate Finance and Economics, Springer, vol. 66(1), pages 169-196, January.

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    More about this item

    Keywords

    Price Dispersion; Anchoring; Loss Aversion; 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
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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