Human behaviour - an underappreciated factor in real estate transaction analyses

Most valuation approaches examine the ups and downturns of real estate prices mainly focussing on the variables lot size, living space, dwelling age and furniture. These approaches disregard the importance of the individual behaviour of private sellers and buyers. As their decisions are often influenced by uncertainty due to poor market transparency it can be assumed that these decisions are - to some extent - not congruent with rational behaviour. Hence, regression analyses should take both factors - objective and behavioural variables - into account. The empirical study (N=413) in this research analyses the behaviour of brokers and sellers who offer their dwellings through the leading brokerage website in Germany, ImmobilienScout24. They are surveyed directly after the initial listing of the dwelling and then again 5 months later. Human behaviour should be explained by real estate related knowledge, expectations, personal situation and heuristic processes. Heuristic processes reduce the complexity and lead to results which do not coincide with rational behaviour. The heuristic process ´adjustment and anchoring´ is especially important for real estate transactions. Generally, a seller starts from an initial value, e.g listing prices of comparable houses at brokerage websites, and adjusts that value to yield her own dwellings´ value. However, this approach is often led by false individual assumptions. First empirical results show that 25% of private sellers significantly overestimate the appropriate listing price. Three-quarter of private sellers admit, that they have only rudimentary knowledge of the property market and one quarter is forced to sell the property urgently. These results indicate that selling and listing prices of residential properties are also influenced by human behaviour.