The endowment effect and housing markets: Empirical evidence from Poland

Mateusz Tomal

ERES from European Real Estate Society (ERES)

Abstract: Housing goods and housing market decisions are extremely complex. This complexity means that standard economic theory is inadequate to fully understand housing market mechanisms. Mainstream economics assumes that buyers and sellers are willing to transact at market price. However, friction between the demand and supply sides of the housing market is often evident, leading to an imbalance and, consequently, a reduction in the number of transactions. Behavioural economics offers an attempt to explain housing market disequilibrium. Behavioural economists emphasise that the deviation of sellers' and buyers' valuations from the market price is, among others, due to the so-called endowment effect. The endowment effect is defined as a behavioural bias resulting in higher valuations of goods we own relative to goods we do not own. To date, empirical studies have mostly looked at the endowment effect for simple goods such as mugs or pens. There is a lack of theoretical and empirical considerations of the endowment effects in different segments of the housing market. Consequently, the purpose of this paper is twofold: (ii) to develop a theoretical model explaining the magnitude of endowment effects in the sales and rental housing markets, with a distinction between primary and secondary markets; (ii) to assess the presence of endowment effects in Poland’s sales and rental housing markets. The empirical research indicated that the endowment effect significantly shapes the Polish residential market. On the sales housing market it amounts on average to 11.95%, i.e. PLN 72,086, while in the rental market, it amounts on average to 7.69%, that is, PLN 212. This difference in the strength of the endowment effect between the sales and rental markets proved to be statistically significant in favour of the former. The endowment effect is also significantly smaller, on average, in primary markets, where sellers treat the dwellings they sell as exchange goods. In this case, its magnitude averaged 10.46% (PLN 63,199) in the sales market and 6.20% (PLN 170) in the rental market. When the supply side treated the object of the transaction as a consumer good, the endowment effect averaged 13.45% (PLN 80,973) in the sales market and 9.17% (PLN 254) in the rental market. Finally, the study did not confirm the hypothesis that the endowment effect varies depending on the housing market cycle phase.

Keywords: Behavioural Economics; endowment effect; market disequilibrium; Polish housing market (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2024-01-01
New Economics Papers: this item is included in nep-ure
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