Sentiment and its asymmetric effect on housing returns

Abstract

The study of cognitive psychology sheds light on how people reason, make choices, and allocate their attention, among other things. The psychology literature argues that people's emotions affect information processing and decision-making. In particular, negative mood states significantly affect people's decisions. Buying or selling a home is one of the most important economic decisions people face in their lives. Financial losses in housing can cause large and irreparable consequences to homeowners. With the high stakes associated with financial decisions in the real estate market, it offers a unique laboratory to assess the potential impact of sentiment. In financial markets, market sentiment, broadly referred to as the overall expectations and beliefs of market participants towards a particular security or market, is believed to be an important determinant of asset prices. 1 In this paper, we propose to construct a sentiment measure to examine the impact of sentiment on real estate-one of the most distinctive and important asset classes that typically comprises a significant portion of one's overall wealth. Unlike the stock market, the housing market features a relatively higher percentage of individual investors, extremely segmented and localized markets, higher levels of information asymmetry, and lack of short-sale mechanisms, all of which make it highly likely to be affected by investor sentiment (Clayton, Ling, & Naranjo, 2009; Hui & Wang, 2014). There have been justifiable discussions pertaining to the impact of sentiment on residential real estate pricing. However, published empirical studies that we are aware of fall short of providing a comprehensive way to measure sentiment of market participants in the residential real estate market by directly observing their behavior.

Sentiment Measurement and its Relationship with Housing Prices: Review of Contemporary Dimensions

“…On the other hand Saydometov et al, (2020) explained sentiment as the reflection the attitude of individuals, in aggregate, about the future prospects of the financial market whereas Soo, (2018) defined sentiment as the phycology behind investors belief in the determination of asset prices.…”

“…They discovered that short-term return reversals, temporary increases in volatility, and mutual fund flows are among the areas where their sentiment constructed index helped to predict changes in price and adding that difficult to arbitrage are more favored by investor sentiment. Using google search frequencies to construct sentiment indices (Saydometov et al, 2020) relied on monthly data from 2004 to 2014 and reported that, negative sentiment negatively impact on future house prices unlike positive sentiment and as well house prices are more reactive to sentiment in recessionary periods. However, in analyzing the extent to which future cross-sectional differences in property values are forecasted by online search intensity through google (Beracha & Wintoki, 2013) established that future house prices can be predicted through abnormal online search intensity.…”

“…In making financial decisions and forecasts people do rely on all the necessary available decisions in the market (Aggarwal, 2014). But Saydometov, Sabherwal, & Aroul, (2020) posited that one of the utmost eco-nomic decisions to make is to sell or buy a house. Putting the housing market into perspective, expressing the beliefs and thoughts of participants in the market is also denoted as behavioural finance but reflected through sentiment analysis.…”

“…*Address correspondence to this author at Graduate School of Business, Universiti Sains Malaysia (USM); E-mail: kwakye@student.usm.my Cognitive phycology study emphasizes on how people make choices, reason and allot their attention among other things and their emotions impact on their decision -making (Saydometov, Sabherwal, &Aroul, 2020 andFreybote &Seagraves, 2017). Zheng & Osmer, (2019) also opined that knowing how and when changes in attitude occure can be important in the determination of swings in the price of financial assets.…”

“…Even though, the role of sentiment in real estate cannot be under estimated, its relationship with house price is not clearly defined due to its measurement. For example, Das et al, (2020) and Saydometov, Sabherwal, & Aroul, (2020) postulated that although sentiment has greater influence on property prices its measurement impedes its study. Whereas Heinig & Nanda, (2018) added that the function of sentiment is well known, but its measurement and effect is not straightforward under dynamic and informationally asymmetric economic conditions, as it may vary for various types of agents through different asset classes at different times.…”