Does it Pay to Escape Herding Behaviour in the Housing Market?

Abstract This article discusses whether it is reasonable for a house buyer to escape herding behavior in the housing market, that is buying when prices rise. We add to the behavioral economics literature, which usually describes in detail why house buyers are irrational but gives usually little recommendations what should be done to make them behave more rationally. We focus our analysis on Poland, a post-socialistic country with a still inadequate housing stock. We compare the costs and gains of buyers that take out a mortgage versus those who rent housing in Warsaw, Poland. The calculation for the period 2010-2022 shows that buying is profitable in the long-term, despite the fact that it is often irrational in the short term. We conclude that only an improvement in the rental market, which absorbs a lot of demand, can make those who need housing become patient and take more rational purchase decisions.