Exposing Buyers to Nominal Data: Agents may expose buyers to nominal data to create a false sense of urgency. For example, they may present a property as having doubled in value over the past 10 years. While this may be true nominally, taking inflation into account reveals a much lower real return. Buyers who fall for this tactic may overestimate the property's potential value, leading to overpayment. This can also encourage FOMO as potential buyers believe they are missing a significant profit opportunity. A cognitive bias known as money illusion plays an important role here, where buyers rely solely on past nominal increases in house prices as a reference point for their value estimates (Raftery and Runeson, 1998).
Releasing Selective Data: Agents may only release the sold price for properties that were sold higher than expected and use the "price not disclosed" tactic for those properties that sold below expectations. This results in buyers having a biased estimate of the value of properties available for sale.
Educate, educate and educate
To avoid falling victim to these tricks, buyers need education. Most of the biases explain above are avoidable if one has enough knowledge about them. It worth even paying for professional help. Academics and researchers should also bear responsibility. At RMIT, we have a state-of-the-art Behavioural Lab (BBL) that aims to conduct experimental research and workshops not only to examine buyer behaviour but also to educate them on how to navigate a real estate transaction more effectively.
Call for better regulations
Data Transparency: There are currently limited laws that enforce data transparency by participants in the housing market. For instance, agents do not currently release the sold price of all properties. This gives them a clear incentive not to disclose prices that are below expectations, resulting in inaccurate value estimates by buyers. Governments can enforce agents to release all prices, or since the government itself has this information, they can make it publicly available.
More precise laws (rules) regarding underquoting can also help as currently underquoting laws do not accurately consider all the possible price manipulations.
Potentially new laws: Government and regulators can enforce laws that makes agents obligated to provide more transparency in private negotiations and silent auctions.
Most participants in other real-world, large-scale auctions invest considerable time and money in consultation and learning before the auction. Homebuyers should be doing exactly this as well. Additionally, there is a pressing need for clearer and more accurate regulations, and the responsibility falls not only on regulators but also on agents, buyers' advocates, buyers, and researchers.
Author:
Dr Peyman Khezr, Senior Lecturer, Economics
