Reference Dependence in the Housing Market

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

No 14147, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Housing; Mortgages; Loss aversion; Reference dependence; Down-payment constraints (search for similar items in EconPapers)
JEL-codes: D03 D12 D14 G02 R21 (search for similar items in EconPapers)
Date: 2022-02
New Economics Papers: this item is included in nep-upt and nep-ure
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