Loss aversion in New Zealand housing

Abstract

We examine whether New Zealand home sellers are loss averse. Our empirical method is based on a large dataset of residential real estate transactions that exploits the most recent substantive housing downturn of 2007–2009. Consistent with loss aversion, we find that houses predicted to sell at a nominal loss realised a premium compared to houses predicted to sell at a nominal gain. We show how this finding causes house price indices to be ‘downward sticky’, preventing house price indices from falling by an additional two and a half percentage points during the downturn.

KEYWORDS:

• Loss aversion
• prospect theory
• house prices
• housing market

Acknowledgement

Greenaway-McGrevy gratefully acknowledges support from the Royal Society of New Zealand under Marsden grant 16-UOA-239. Haworth gratefully acknowledges support from the Kelliher Trust.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 For example, the USA has had twelve systemic banking crises since 1840, while Canada has had none. See Calomiris and Haber (2015) for an in-depth inquiry into the institutional origins of banking crises.

2 See Hansard debate 19 December 2017, https://www.parliament.nz/en/pb/hansard-debates/rhr/combined/HansDeb_20171219_20171219_16.

3 See Hansard debate 8 September 2015, https://www.parliament.nz/en/pb/hansard-debates/rhr/document/51HansD_20150908/volume-708-week-27-tuesday-8-september-2015.

4 In one of our robustness checks we exploit recent strengthening of macro prudential policy to rule-out the impact of equity constraints on estimation, See the discussion in subsection 4.3 below.

Additional information

Funding

This work was supported by Royal Society of New Zealand [grant number 16-UOA-239].