Reference Dependence in the UK Property Market

Abstract

The study of reference dependence in property markets is of practical importance due to the unusual characteristics of property transactions, such as high information asymmetry caused by many individuals’ lack of experience in property markets. The overall low transaction frequency and general illiquidity of property markets can exacerbate and reinforce irrational behaviours such as reference dependence. The knowledge gained through an empirical investigation in the UK property market can assist in the attenuation of these distortions. We use a UK online panel data provider, Prolific, to conduct an online experiment on the formation and adaptation of reference points among home buyers and sellers in the UK. Over 600 valid responses were collected in January 2019. By analysing the reported ‘willingness to pay’ of buyers and ‘willingness to accept’ of sellers this paper identifies the presence of behavioural biases in the UK property market, and the extent to which they are caused by both historical and recent prices. The influence of aspirations and social comparisons is established in this novel context. The results of the experiment clearly indicate that reference dependence is prevalent in the UK property market, and both aspiration and social comparisons affect reference point dependence significantly. The observed behavioural bias in housing decisions are “predictably irrational”. The findings of this study pave the way for reliable economic modelling of such irrationality and a better understanding of behaviours in the housing market.