The price paid: Heuristic thinking and biased reference points in the housing market

Does the power of reference points mean that minute differences in a purchase price then reverberate in future sales prices? In this research, I show that if previous sales prices are round numbers, defined as multiples of £1,000 (e.g. £231,000), subsequent sales prices entail a considerable premium relative to similar properties that were previously priced at charm numbers that are marginally below those round numbers (e.g. £230,999 or £230,950). Using a sample of repeat sales from the Greater London region from 1995 to 2017, I estimate the premium to be approximately 4 percent after controlling for property characteristics and a large set of fixed effects. Increasing public accessibility of information attenuates the effect. Tax considerations, financial constraints, and pricing errors cannot explain the result. I propose a framework of reference dependence and left-digit bias to explain the result, highlighting the presence of behavioural biases in household decisions, even when very high stakes are involved.