A recent study by the VATT Institute for Economic Research sheds light on an interesting phenomenon in the housing market: Selling an apartment at a loss feels so unpleasant that it slows down the mobility of Finnish households.

In addition to high purchase and selling costs, migration is hindered by nominal loss aversion. This is a phenomenon where homeowners try to avoid selling their home for a price lower than the nominal price, meaning the price they originally paid for it. For many, this is a matter where emotion or principle guides the decision. If one is moving to a larger apartment in the same area, its price has likely also decreased. If one were willing to sell their current apartment at a loss, they could potentially acquire the larger apartment significantly cheaper in relative terms. From an overall perspective, selling at a loss could, in fact, be an economically sound choice.

This operating principle does not only affect individual selling decisions, but it has broader implications for the entire economy, as it can lead to an inefficient allocation of the housing stock and even the workforce.

Loss aversion halves willingness to sell

The VATT study, which examines Finland’s three largest commuter areas (Helsinki, Tampere, and Turku) during the period 2006–2018, found a clear discontinuity in the willingness to sell at the zero-profit threshold.

The study is particularly interesting right now, as housing prices have fallen in many localities. It provides an indication of why sales volume is slow – owners are waiting for a price increase to avoid a nominal loss.

Homeowners whose predicted selling price was below the original purchase price (i.e., a nominal loss was expected) were 51% less likely to sell their apartment than those who were expected to make even a small profit.

Moving without selling is common

The study reveals that about 20% of owner-occupiers who move did not sell their previous home, even by the end of the following year.

When a loss threatens, many Finnish owners choose to rent out their former apartment to avoid realizing the loss and move into a rental or a new apartment themselves.

Loss aversion has a broader impact

Loss aversion has consequences that affect both individuals and the national economy.

Loss aversion leads to inefficiency in the economy. The study highlighted two significant points, misallocation of the housing stock and the workforce.

  • Misallocation of the housing stock refers to the fact that people do not move into the apartments best suited for them if it requires accepting a sales loss.
  • Misallocation of the workforce means that avoiding a loss also reduces inter-regional migration.

While loss aversion is human, it can be costly for households if it prevents them from acquiring a better home or job.

What can be learned from this?

The VATT study emphasizes that in a moving situation, the homeowner should carefully weigh how much a longer selling period and higher housing costs will cost compared to the nominal loss they might have to accept from the sale.

If the value of the apartment is predicted to be below the purchase price, it is often economically more sensible to accept the loss quickly than to keep the apartment on the market for a long time and pay running costs.

Source: The study “Nominal Loss Aversion in the Housing Market and Household Mobility” is available in its entirety.

 

Ville Korte

Head of Sales and Marketing
The author has over 20 years of experience in mortgage lending at Garantia and in the banking sector.