Beyond Loss Aversion and Liquidity Traps: A Behavioural Stated Choice Analysis of Speculation, Over-Leverage, and Residential Housing Prices in Kenya's Affordable Housing Agenda
DOI:
https://doi.org/10.59413/ajocs/v7.i2.39Keywords:
Loss aversion, Over-leverage, Liquidity, Stated Choice Methods, Residential Housing Prices, Behavioural Economics, Affordable Housing, Kenya, Prospect Theory, Financial LiteracyAbstract
The global residential housing crisis has increasingly been attributed to behavioural anomalies rather than to purely rational market forces. Yet, the empirical integration of loss aversion, over-leverage, and liquidity dynamics within emerging African housing markets remains critically underdeveloped. This study advances a comprehensive behavioural framework for understanding residential housing price determination in Kenya, drawing on stated choice (SC) methods and prospect theory to analyse how loss aversion interacts with over-leverage and liquidity constraints to drive speculative price distortions. Analysing data from 234 real estate investors through real estate agents in Kenya, by using a multi-stage approach, the research employs hierarchical regression and mediation analysis to examine how psychological expectations mediate the relationship between microeconomic indicators and residential housing prices. Findings reveal that locational attributes exert the strongest influence on housing prices (β = 0.846, p < 0.001), while psychological expectations mediate price formation, with emotional biases (ΔR² = 0.089) demonstrating stronger mediating influence than cognitive errors (ΔR² = 0.082). Critically, loss aversion emerges as a dominant behavioural driver, explaining investor reluctance to sell depreciating assets and amplifying over-leverage during market peaks. The study proposes an integrated behavioural framework for Kenya's Affordable Housing Agenda, incorporating: (1) financial literacy strategies targeting loss aversion and overconfidence biases, (2) regulatory measures including counter-cyclical loan-to-value ratios and liquidity requirements to mitigate speculative herding, and (3) choice architecture modifications leveraging stated choice insights to enhance market efficiency. The findings challenge traditional rational market assumptions, demonstrating that behavioural factors systematically distort residential housing price formation in emerging African contexts, with significant implications for policy, valuation practice, and investment strategy.
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