Decreasing House Prices and Household Mobility: An Empirical Study on Loss Aversion and Negative Equity

Abstract

This paper examines the effects of loss aversion and negative equity on household mobility. We stress the importance of studying these mechanisms simultaneously. By making use of a unique administrative data set of Statistics Netherlands, covering the period 2006–2011, we estimate the effects of loss aversion and negative equity. The results provide strong evidence for loss aversion, while less evidence is found for a lock‐in effect of negative equity. The results indicate that moderately underwater households do have a lower mobility, but heavily underwater households do not. Additional results indicate that the particularly high mobility of heavily underwater households is not default‐driven.

Keywords: household mobility, housing market, loss aversion, negative equity