Why Households Undermine Sustainable Housing Policies: A Behavioral Housing Finance Perspective

Sustainability-oriented housing policies rely on financial incentives, green mortgage products, and energy-efficiency programs to achieve environmental and long-term social objectives. However, their effectiveness remains limited at the household level, raising questions about why these instruments underperform despite growing policy attention and institutional support. While previous research has examined household responses to sustainable housing measures and behavioral influences on housing decisions, less attention has been paid to how behavioral mechanisms interact with mortgage finance in shaping the effectiveness of sustainability-oriented housing policies. This paper addresses this gap by integrating behavioral economics, housing finance and sustainable housing research within a unified perspective. It focuses on the mismatch between policy assumptions and behavioral processes underlying housing and mortgage decisions. Using insights from behavioral housing finance, it develops a conceptual framework that explains how households evaluate and respond to sustainability-related housing interventions. The literature review integrates evidence on behavioral mechanisms and financial constraints and examines their role in housing-related financial decisions and policy responses. The analysis shows that household decisions are driven by short-term affordability concerns, decision heuristics, and subjective perceptions of financial risk. As a result, behavioral mechanisms such as present bias, mental accounting, and framing effects reduce the importance of long-term financial stability and environmental benefits in housing choices. The findings suggest that policy uptake alone is a weak indicator of success, as participation in sustainability-oriented programs does not necessarily translate into lasting behavioral or environmental change. This highlights the importance of aligning housing policy design with household decision-making processes and behavioral realities.