EXPLORING LOSS AVERSION BEHAVIOUR IN THE SINGAPORE PRIVATE RESIDENTIAL MARKET

Abstract

Psychological behaviour has been shown to drive market outcomes. One such behaviour is loss aversion where individuals have the tendency to strongly prefer evading losses rather than acquiring gains. If loss aversion is present, particularly due to the holding power of market participants, policies that impose transaction costs on sellers such as the Seller’s Stamp Duty (SSD) may lead to slower price correction than intended. We investigate if loss aversion is present in the Singapore private residential market using the transaction data of all private residential properties from January 1995 to November 2013. Hedonic price indices are constructed using Ordinary Least Squares multiple regressions for properties that are affected and unaffected by the SSD respectively. Over the periods when the SSD was in force, the capital gains of affected properties net of the SSD exceeded those of unaffected properties. This is consistent with loss aversion as sellers that face additional transaction costs set higher reservation prices to attain greater capital gains while those not subject to the SSD are willing to accept lower prices. We find no clear evidence of loss aversion in a market downturn, suggesting that market participants are more willing to sell when house prices are falling. However, loss aversion behaviour is observed when the market is rising or plateauing. This study suggests that the asymmetry in house price changes can be explained by loss aversion. It also explains why, in the absence of clear evidence of market declines, housing markets may not be easily cooled by macro-prudential measures such as the SSD.