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Reference Dependence in the Housing Market

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  • Andersen, Steffen
  • Badarinza, Cristian
  • Liu, Lu
  • Marx, Julie
  • Ramadorai, Tarun

Abstract

We quantify reference dependence and loss aversion in the housing market, using a structural model of the house selling decision estimated on rich Danish administrative data. Households derive substantial utility from gains and losses over the original house purchase price, with losses affecting households 2 to 2.5 times more than gains. The model shows that reference dependence and loss aversion, in combination with household responses to mortgage down-payment constraints can help to explain the positive correlation between aggregate house prices and turnover. The model cannot fully explain the new empirical observation that reference-dependence appears attenuated when households are more financially constrained.

Suggested Citation

  • Andersen, Steffen & Badarinza, Cristian & Liu, Lu & Marx, Julie & Ramadorai, Tarun, 2022. "Reference Dependence in the Housing Market," CEPR Discussion Papers 14147, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14147
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    Cited by:

    1. Bramoullé, Y. & Ghiglino, C., 2024. "Status Consumption in Networks: A Reference Dependent Approach," Janeway Institute Working Papers 2409, Faculty of Economics, University of Cambridge.
    2. Badarinza, Cristian & Ramadorai, Tarun & Siljander, Juhana & Tripathy, Jagdish, 2024. "Behavioral Lock-In: Aggregate Implications of Reference Dependence in the Housing Market," CEPR Discussion Papers 19123, C.E.P.R. Discussion Papers.
    3. Gal Amedi, 2023. "The Determinants of the Transit Accessibility Premium," Bank of Israel Working Papers 2023.12, Bank of Israel.
    4. Ross, Stephen L. & Zhou, Tingyu, 2024. "Loss aversion and focal point bias: Empirical evidence from housing markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 42(C).
    5. Mathieu Aubry & Roman Kräussl & Gustavo Manso & Christophe Spaenjers, 2023. "Biased Auctioneers," Journal of Finance, American Finance Association, vol. 78(2), pages 795-833, April.
    6. Daniel Reck & Arthur Seibold, 2023. "The Welfare Economics of Reference Dependence," CRC TR 224 Discussion Paper Series crctr224_2023_450, University of Bonn and University of Mannheim, Germany.

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    More about this item

    Keywords

    Housing; Mortgages; Loss aversion; Reference dependence; Down-payment constraints;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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