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Loss aversion in housing price appraisals among Italian homeowners

Author

Listed:
  • Andrea Lamorgese

    (Bank of Italy)

  • Dario Pellegrino

    (Bank of Italy)

Abstract

Several stylized facts, such as the correlation between house prices and sales volumes, suggest the existence of downward price rigidity in real estate markets. In this paper we explore a potential explanation for this behaviour by testing whether initial purchase prices and homeowners� appraisals of their dwellings show reference dependence. Using data from a sample of Italian households, we test whether - conditional on both observable and unobservable characteristics - homeowners appraise the value of their main dwelling differently depending on the price at which they purchased it. We find that homeowners expecting a loss do not adjust their appraisals significantly in response to downward market conditions while, for those expecting a gain, the appraisals are independent of the price at which they bought the home. While loss aversion is mildly higher among poorer and less educated households, we find strong evidence of it across all demographic groups in our sample.

Suggested Citation

  • 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.
    • Handle: RePEc:bdi:wptemi:td_1248_19
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2019/2019-1248/en_tema_1248.pdf
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    References listed on IDEAS

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    Cited by:

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    2. Niklas Gohl & Peter Haan & Claus Michelsen & Felix Weinhardt, 2022. "House Price Expectations," Discussion Papers of DIW Berlin 1994, DIW Berlin, German Institute for Economic Research.
    3. Gohl, Niklas & Haan, Peter & Michelsen, Claus & Weinhardt, Felix, 2022. "House Price Expectations," IZA Discussion Papers 15040, Institute of Labor Economics (IZA).
    4. Niklas Gohl & Peter Haan & Claus Michelsen & Felix Weinhardt, 2022. "House Price Expectations," SOEPpapers on Multidisciplinary Panel Data Research 1162, DIW Berlin, The German Socio-Economic Panel (SOEP).
    5. Gohl, Niklas & Haan, Peter & Michelsen, Claus & Weinhardt, Felix, 2022. "House Price Expectations," Rationality and Competition Discussion Paper Series 313, CRC TRR 190 Rationality and Competition.
    6. Gohl, Niklas & Haan, Peter & Michelsen, Claus & Weinhardt, Felix Julian, 2022. "House price expectations," LSE Research Online Documents on Economics 117761, London School of Economics and Political Science, LSE Library.
    7. Gohl, Niklas & Haan, Peter & Michelsen, Claus & Weinhardt, Felix, 2024. "House price expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 218(C), pages 379-398.
    8. Niklas Gohl & Peter Haan & Claus Michelsen & Felix Weinhardt, 2022. "House price expectations," CEP Discussion Papers dp1829, Centre for Economic Performance, LSE.

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    More about this item

    Keywords

    loss aversion; prospect theory; housing market;
    All these keywords.

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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