Multiple Reference Points and Length of Ownership in the Housing Market

Abstract

Reference-dependent utility has been shown to have a significant influence on housing market activity. Sellers facing a nominal loss on their home due to market conditions, tend to inflate the asking price and thus the transaction price of their home, indicative of loss aversion. However, the original purchase price of a home may lose influence as a reference-point as the period of ownership increases, while homeowners rely increasingly on other benchmarks such as neighboring homes’ sales prices as reference points. In other words, a homeowner may have multiple reference points in their underlying utility function, whose relative influences shift in importance over time. We use comprehensive administrative data on residential real estate transactions in Singapore’s private housing market to test the influences of original purchase price and recent neighborhood price as reference points over the length of homeownership. Purchase price and neighborhood price are each valid reference points based on established empirical methods in the behavioral and housing economics literature. By testing for their relative influences as a function of length of ownership, we find that prior purchase price is more influential for the first years of ownership, while neighborhood price becomes more influential during the subsequent holding years. Finally, we provide a theoretical framework for understanding the relative influences of multiple reference points over time, which supports the empirical findings.