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Can Anchoring and Loss Aversion Explain the Predictability of Housing Prices?


  • This work was partly undertaken while the second author was visiting and supported by the Hong Kong Institute of Monetary Research. We thank Charles Leung and Matthew Yiu for helpful suggestions. We thank Debbie Leung, Fengjiao Chen, Jiao Lin and King Wa Yau for their help in extracting the Economic Property Research Center data, and one referee for useful comments. This paper was supported in part by a Direct Grant from the Chinese University of Hong Kong.

Address for Correspondence: Department of Economics, Chinese University of Hong Kong, 914 Esther Lee Building, Chung Chi Campus, Shatin, Hong Kong. Email:


We offer an explanation of why changes in house price are predictable. We consider a housing market with loss-averse sellers and anchoring buyers in a dynamic setting. We show that when both cognitive biases are present, changes in house prices are predicted by price dispersion and trade volume. Using a sample of housing transactions in Hong Kong from 1992 to 2006, we find that price dispersion and transaction volume are, indeed, powerful predictors of housing return. For both in and out of sample, the two variables predict as well as conventional predictors such as the real interest rate and real stock return.