Money illusion in consumer perception of housing transactions

Abstract

Money illusion is a bias in the assessment of the real value of economic transactions, induced by their nominal evaluation. By definition, money illusion may only be manifested in the presence of inflation. This paper presents the results of an experiment which shows that the actual behaviour of subjects departed from theoretical expectations and that the subjects failed to recognize the underlying real values and instead made nominal evaluations. The evidence has the further implication that, in the absence of some house price escalation, there may be a tendency for vendor’s asking prices to be “sticky”. Thus, in these circumstances the asking price of the property will tend to function less well as a signal of relative scarcity in the marketplace.