Premium
Can Anchoring and Loss Aversion Explain the Predictability of Housing Prices?
Author(s) -
Leung Tin Cheuk,
Tsang Kwok Ping
Publication year - 2013
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.12009
Subject(s) - anchoring , economics , predictability , loss aversion , price dispersion , stock (firearms) , database transaction , sample (material) , econometrics , dispersion (optics) , monetary economics , financial economics , microeconomics , engineering , mechanical engineering , programming language , chemistry , physics , structural engineering , optics , chromatography , quantum mechanics , computer science
We offer an explanation of why changes in house price are predictable. We consider a housing market with loss‐averse sellers and anchoring buyers in a dynamic setting. We show that when both cognitive biases are present, changes in house prices are predicted by price dispersion and trade volume. Using a sample of housing transactions in H ong K ong from 1992 to 2006, we find that price dispersion and transaction volume are, indeed, powerful predictors of housing return. For both in and out of sample, the two variables predict as well as conventional predictors such as the real interest rate and real stock return.