Endowment Effects of Shared Ownership: Evidence from Hong Kong

Abstract

ABSTRACTThe endowment effect is a behavioral bias; postulating people demand more to part with an object they own than they would offer to acquire the same object owned by others. Recent experimental research, however, suggests that this effect applies to consumption goods rather than exchange goods. Given that housing is a mix of consumption and exchange goods, it presents a unique opportunity to examine whether the effect exists in the real world through a quasi-experiment. Based on a policy change that relaxed the resale constraints of shared ownership housing in Hong Kong, we found that more constrained homeowners were more likely to sell their homes compared to those with fewer constraints when granted the right to exchange, all other factors affecting liquidity being held constant. This marks the first field study revealing that the endowment effect diminishes when a good enhances its exchange nature, such as being given an exchange right.KEYWORDS: Shared homeownershipquasi-experimentendowment effectsexchange asymmetrybehavioral Science Disclosure StatementNo potential conflict of interest was reported by the author(s).Notes1. The official name of the premium waiver policy is called “The interim scheme of extending the HOS secondary market to White Form buyers”.2. Besides probability of trade, the endowment effect hypothesis also implies that the price of the HOS unit will be higher after the policy. The empirical test on the price effect requires a very different approach to model, and therefore it will be reported separately in another working paper.3. As we study the endowment effect empirically, the willingness to pay of all potential buyers is assumed to form a normal distribution, and the intensity of the endowment effect is assumed to be reflected by the change in the trading liquidity (probability of trade) in the specific housing market.4. The tightening measures apply to the resales of HOS units with premium settled.5. An initial assessment of the WFB policy (i.e. Interim Scheme) can be available at http://www.legco.gov.hk/yr14–15/english/panels/hg/papers/hg20150105cb1-384-4-e.pdf6. The WFB policy is officially called as “The Interim Scheme to Extend the Home Ownership Scheme Secondary Market to White Form Buyers”.7. Two terms are omitted in Equation (1b), they are dm and dm×WFBPt. It is because private housing does not have discount rates. These two variables will be exact collinear with HOSm.8. Nygaard et al. (Citation2007) suggest these attributes include an asset base (wealth), a source of revenue (rent), a source of patronage or constituency building, a community asset and a resource (vehicle) for homelessness and urban renewal policy.9. According to the memorandum for the subsidized housing committee on the initial ideas on price setting and for calculating the premium payable under the new Home Ownership Scheme (HKHA Citation2012), for the traditional HOS, the discount rate was determined based on the affordability of the households within the HOS income limit, as guided by the following two principles: “(a) eligible households could afford the flats with a mortgage-to-income ratio of not more than 40%; and (b) at least 50% of the flats for sale should be ‘affordable’ as defined in (a) after applying a discount rate to the market value of flats”.Additional informationFundingThe work was supported by the Research Grant Council of Hong Kong [General Research Fund (Grant number 17612017)] and the University of Auckland Early Career Research Excellence Award (Ref: 3726886).