Stories | February 1, 2018

Beware the Ikea effect! Why buying or selling a house can mess with your mind

Moving house is stressful - and full of thinking traps.

It’s nearly spring – a time when many people start thinking about moving house. And anyone who has ever bought or sold a home knows just what an emotional time it can be, with surveys placing it just below getting divorced on the stressful life events scale.

For a start, when it comes to negotiating the price, buyers and sellers often disagree about how much the house is actually worth; a 2015 study of American homeowners, for example, found they overestimated the value of their houses by an average eight percent. 

For the seller, simply owning the house means they think it’s worth more than they would if buying the exact same house again, a phenomenon known as the endowment effect.

Hate to lose
Researchers have suggested that the seller experiences loss aversion – where we feel the pain of a loss more than an equivalent gain. We can justify “losing” something in our possession, if someone is willing to pay a premium for it. 

More recent studies have suggested that the endowment effect may occur because ownership “creates an association between the item and the self”. Researchers tested this by subjecting people to “self-threats” - making them feel bad about themselves by focusing on a time they were rejected.

They found that these people subsequently demanded more money to sell an object that they owned compared to the price charged by people whose self-esteem was still intact. The rejected group were using their possessions to “affirm their self”, which backs up the theory that possessions become a part of us. We might, therefore, overvalue our homes simply because they become part of who we are. 

Sellers who have spent all their free time painting walls and laying floors may be particularly unrealistic about the value of their homes. Dubbed the “Ikea effect”, it’s the tendency to be more enthusiastic about our own creations than others would be. Keen-DIYers build up “sweat equity” in their property and believe the price has risen accordingly with their efforts.

Top dollar
Buyers should also be wary of falling in love with a house that’s being sold by someone who bought at the top of the market. These vendors are more likely to hold out for a higher price than those who bought a comparable home when house prices were lower, according to Bank of England research.

No one wants to feel like they’ve made a bad investment, so those who bought high ask for more when they sell on. This psychological effect holds true even when the seller is mortgage-free and not requiring a high sale price for the deposit on their next home.

Of course, sellers may well find that person willing to pay top dollar for their property – but it can also mean their home languishes on the property market for months. One way they can try to secure a good price, though, is to use the concept of “anchoring”. This is the way that people tend to rely heavily on an initial piece of information when making decisions.

Listing the house for a high price would mean that when it comes to negotiations, buyers will have that figure in mind, and may potentially offer more  than they would if it was listed for a lower figure. While estate agents often recommend under-pricing in the hope of attracting more interest and generating a bidding war, studies have shown that it’s higher listing values that actually result in higher sale prices.

Premium prices
If you’re not tied to putting your house on the market at a specific time, try timing it for spring or summer. People tend to pay more for houses in spring, according to an analysis of data by American property website Zillow. It found that homes in the USA sold from mid-March to mid-April sold for two percent more than the average listing – a premium of $4,000.

A study by the London School of Economics backs this up. It found that American house prices increased by three percentage points in the spring and summer, while UK prices jumped by eight percentage points. With buyers more inclined to view houses when the weather perks up there’s more demand, so vendors can charge more. Savvy buyers should wrap up warm and get looking in autumn and winter.

While there are many different reasons for moving house, be wary of relocating to a more aspirational neighbourhood just because you can. Social comparison theory describes the way that we often determine our worth based on how we stack up against others. Behavioural economist George Loewenstein and his team explain how some people might move to a new area to give themselves a sensation of status relative to their current peers.

But as soon as they’re in the new neighbourhood they start comparing themselves to their richer neighbours, with their expensive cars and bigger houses, and don’t feel as good as they thought they would.

So think hard about whether the grass on that new lawn really will be greener. You might be better off skipping the stress of moving and staying put instead.

eZonomics team
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