Loss aversion in housing appraisal: Evidence from Italian homeowners

Abstract

Loss aversion is considered a driver of downward price rigidity in real estate markets: during downturns – when market price of their house is below the price at which they purchased it – loss averse homeowners do not evaluate their houses at the former one but anchor the resale price to the latter price. As a consequence, prices are sluggish to adjust downward, time to sale becomes longer, ask and transaction prices differ.

We document loss aversion for the Italian real estate market and complement the existing literature along two dimensions: (i) we test for loss aversion using homeowners’ evaluations of their houses, rather than ask or final prices, as customary in the literature; (ii) we document variation across household characteristics in the degree of loss aversion.

We find that homeowners subject to estimated losses stick to the price at which they purchased and do not revise their assessment in response to downward market conditions, whereas the evaluation of those expecting a gain is independent of previous sale prices. Although there is a strong case for loss aversion in our sample, we document some variation across demographic groups: poorer, younger and less educated households show more reference dependence than the average one.