Could Loss Aversion Retain on the Market? Evidence from the Hong Kong Property Market

Abstract

Loss aversion not only affects the list price of properties but can retain on actual transactions. Utilizing the data of over a million commercial and residential property transactions in Hong Kong from 1991 to 2015, we find that sellers facing nominal losses relative to their prior purchase prices attained higher selling prices than their counterparts. We suggest two market factors to account for the extent of the loss aversion effect on the market transaction prices. First, the loss aversion effect is only prominent when comparable transaction information is not readily accessible, such as in the less-transacted commercial property market. Second, our results suggest the relevance of loss aversion to the boom-bust property cycle in both the residential and commercial markets. The effect of loss aversion on transaction prices is relatively weak in the bust period between 1998 and 2003 when the Hong Kong property market lost almost two-thirds of its value, and it enlarges with the market recovering. The power of loss aversion is not attenuated at the aggregate market level but is associated with strong reductions in price declines in the bust period and in the commercial market. These results have implications for understanding the market adjustment of loss aversion in different property sectors and its association with the aggregate market dynamics in a boom-bust property cycle.