DP14147 Reference Dependence in the Housing Market

Author(s): Steffen Andersen, Cristian Badarinza, Lu Liu, Julie Marx, Tarun Ramadorai
Publication Date: November 2019
Date Revised: February 2022
Keyword(s): down-payment constraints, housing, loss aversion, Mortgages, reference dependence
JEL(s): D03, D12, D14, G02, R21
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14147

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.