IDEAS home Printed from https://ideas.repec.org/p/cpb/discus/314.html
   My bibliography  Save this paper

Estimating the weight of opportunity costs in housing consumption

Author

Listed:
  • Machiel van Dijk

Abstract

People tend to neglect or underweight opportunity costs. Strong empirical evidence for the size of the underweighting appears to be absent. What are the weights people attach to opportunity costs relative to out-of-pocket costs? In this paper I estimate the weight of opportunity costs in probably the largest economic decision that households make: buying a house. I show that homeowners attach approximately twice as much weight to out-of-pocket costs of their housing consumption than to the opportunity costs associated with this. Highlights Housing consumption lends itself well for empirically analyzing opportunity costs. I split up the user costs of housing in out-of-pocket and opportunity costs. Homeowners weigh in their opportunity costs at only 50 to 65 percent. It is unclear whether homeowners underestimate these costs or simply care less about them.

Suggested Citation

  • Machiel van Dijk, 2015. "Estimating the weight of opportunity costs in housing consumption," CPB Discussion Paper 314, CPB Netherlands Bureau for Economic Policy Analysis.
    • Handle: RePEc:cpb:discus:314
    as

    Download full text from publisher

    File URL: https://www.cpb.nl/sites/default/files/publicaties/download/cpb-discussion-paper-314-estimating-weight-opportunity-costs-housing-consumption.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Brent W. Ambrose & Piet Eichholtz & Thies Lindenthal, 2013. "House Prices and Fundamentals: 355 Years of Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(2-3), pages 477-491, March.
    2. Shefrin, Hersh M & Thaler, Richard H, 1988. "The Behavioral Life-Cycle Hypothesis," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 609-643, October.
    3. Shane Frederick & Nathan Novemsky & Jing Wang & Ravi Dhar & Stephen Nowlis, 2009. "Opportunity Cost Neglect," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 36(4), pages 553-561, December.
    4. Hoskin, Re, 1983. "Opportunity Cost And Behavior," Journal of Accounting Research, Wiley Blackwell, vol. 21(1), pages 78-95.
    5. repec:mcb:jmoncb:v:45:y:2013:i::p:477-491 is not listed on IDEAS
    6. Victor Stango & Jonathan Zinman, 2009. "What Do Consumers Really Pay on Their Checking and Credit Card Accounts? Explicit, Implicit, and Avoidable Costs," American Economic Review, American Economic Association, vol. 99(2), pages 424-429, May.
    7. James M. Poterba, 1984. "Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(4), pages 729-752.
    8. Nava Ashraf & Colin F. Camerer & George Loewenstein, 2005. "Adam Smith, Behavioral Economist," Journal of Economic Perspectives, American Economic Association, vol. 19(3), pages 131-145, Summer.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stefan Groot & Arjan Lejour, 2017. "Tax arbitrage incentives for mortgage prepayment behavior: Evidence from Dutch micro data," CPB Discussion Paper 350, CPB Netherlands Bureau for Economic Policy Analysis.
    2. Stefan Groot & Arjan Lejour, 2017. "Tax arbitrage incentives for mortgage prepayment behavior: Evidence from Dutch micro data," CPB Discussion Paper 350.rdf, CPB Netherlands Bureau for Economic Policy Analysis.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Machiel van Dijk, 2015. "Estimating the weight of opportunity costs in housing consumption," CPB Discussion Paper 314.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    2. Johan Almenberg & Artashes Karapetyan, 2009. "Mental accounting in the housing market," IEW - Working Papers 453, Institute for Empirical Research in Economics - University of Zurich.
    3. Perry Singleton, 2015. "Health, Medical Innovation, and Disability Insurance: A Care Study of HIV Antiretroviral Therapy," Center for Policy Research Working Papers 182, Center for Policy Research, Maxwell School, Syracuse University.
    4. Baltagi, Badi H. & Li, Jing, 2015. "Cointegration of matched home purchases and rental price indexes — Evidence from Singapore," Regional Science and Urban Economics, Elsevier, vol. 55(C), pages 80-88.
    5. Gröbel, Sören & Ihle, Dorothee, 2016. "Saving behavior and housing wealth: Evidence from German micro data," CAWM Discussion Papers 90, University of Münster, Münster Center for Economic Policy (MEP).
    6. Karpestam, Peter & Johansson, Sebastian, 2019. "Interest-only-mortgages and housing market fluctuations in Denmark," Journal of Housing Economics, Elsevier, vol. 46(C).
    7. Damen, Sven & Vastmans, Frank & Buyst, Erik, 2016. "The effect of mortgage interest deduction and mortgage characteristics on house prices," Journal of Housing Economics, Elsevier, vol. 34(C), pages 15-29.
    8. Besharat, Ali & Nardini, Gia, 2018. "When indulgence gets the best of you: Unexpected consequences of prepayment," Journal of Business Research, Elsevier, vol. 92(C), pages 321-328.
    9. Madsen, Jakob B., 2012. "A behavioral model of house prices," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 21-38.
    10. Eyal Aharoni & Heather M Kleider-Offutt & Sarah F Brosnan & Sharlene Fernandes, 2020. "Slippery scales: Cost prompts, but not benefit prompts, modulate sentencing recommendations in laypeople," PLOS ONE, Public Library of Science, vol. 15(7), pages 1-17, July.
    11. Richard Keely & Ronan C. Lyons, 2022. "Housing Prices, Yields and Credit Conditions in Dublin since 1945," The Journal of Real Estate Finance and Economics, Springer, vol. 64(3), pages 404-439, April.
    12. Philippe Bracke, 2015. "House Prices and Rents: Microevidence from a Matched Data Set in Central London," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(2), pages 403-431, June.
    13. Eduard Marinov, 2017. "The 2017 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 117-159.
    14. Committee, Nobel Prize, 2017. "Richard H. Thaler: Integrating Economics with Psychology," Nobel Prize in Economics documents 2017-1, Nobel Prize Committee.
    15. Chen, Jie & Chen, Yu & Hill, Robert J. & Hu, Pei, 2022. "The user cost of housing and the price-rent ratio in Shanghai," Regional Science and Urban Economics, Elsevier, vol. 92(C).
    16. Lyons, Ronan C., 2018. "Credit conditions and the housing price ratio: Evidence from Ireland’s boom and bust," Journal of Housing Economics, Elsevier, vol. 42(C), pages 84-96.
    17. Glaeser, Edward L. & Nathanson, Charles G., 2015. "Housing Bubbles," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 701-751, Elsevier.
    18. repec:zbw:cawmdp:86 is not listed on IDEAS
    19. Edward L. Glaeser & Charles G. Nathanson, 2014. "Housing Bubbles," NBER Working Papers 20426, National Bureau of Economic Research, Inc.
    20. Niklas Dreyer & Robert M. Gillenkirch, 2019. "Cash versus opportunity costs and revenues in bilateral bargaining," Journal of Business Economics, Springer, vol. 89(4), pages 357-383, June.
    21. Ronan C Lyons, 2017. "Credit conditions and the housing price ratio: evidence from Ireland's bubble and crash," Trinity Economics Papers tep0717, Trinity College Dublin, Department of Economics.

    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpb:discus:314. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/cpbgvnl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.