Content area
Full text
Abstract
The decision of buying residential property may be one of the most important transactions people will ever make, and the emotional attachment when houses become homes is inevitable. Nevertheless, this stylized fact appears to be underrepresented in the literature. While its importance is undeniable, the consumption function, as well as the social and emotional perspective of real estate are often neglected. We provide an overview of the current state of affairs of the main themes in which the behavioral approach intersects with real estate to gain a deeper understanding of the built environment. It seems to be a general consensus that behavioral studies can help to provide insight into property markets, but that a large component of behavioral decision making is left undefined.
Traditional financial theory is based on the notion that investors act rationally, correctly considering all currently available information in the decision-making process (Kishore, 2006). Such "decision makers" are characterized as logically weighing the respective costs and benefits before acting. This behavior is in line with the concept of utility maximization (UM). UM is a theory derived from a rational decision making assumption. In finance, UM at the individual level leads to the efficient market hypothesis (EMH), as introduced by Fama (1970). Under EMH, markets reflect all available information. Applied to real estate, this line of thinking implies that excess returns to real estate are unpredictable based on currently available information.
Although it is commonly known that real estate markets are rather illiquid, the majority of academics assume that these markets are efficient; it is assumed that participants act in accordance with rationality. Farlow (2013), for example, argues that the fundamental determinants of house prices are income, interest rates, housing stock, demographic changes, credit availability, and tax structures. By the end of the 1980s, however, studies that concluded that housing markets are inefficient became more popular. Case and Shiller (1989) find positive serial correlation in single-family homes. In addition, they conclude that information relating to real interest rates, which should be an important determinant, does not appear to be incorporated into the pricing of housing. Extended research by Case and Shiller (1990), with additional fundamental forecasting variables, leads to a comparable conclusion: price changes observed in one year succeed in the...