Does the Dream of Home Ownership Rest upon Biased Beliefs? A Test Based on Predicted and Realized Life Satisfaction

Abstract

The belief that home ownership makes people happy is probably one of the most widespread intuitive theories of happiness. However, whether it is accurate is an open question. Based on individual panel data, we explore whether home buyers systematically overestimate the life satisfaction associated with moving to their privately owned property. To identify potential prediction errors, we compare people’s forecasts of their life satisfaction in 5 years’ time with their current realizations. We find that home buyers for whom the purchase of the home is a main reason for moving, on average, systematically overestimate the long-term satisfaction gain of living in their dwelling. The misprediction therein is driven by home buyers who follow extrinsically-oriented life goals, highlighting biased beliefs regarding own preferences as a relevant mechanism in the prediction errors.