Behavioural Biases and Information Disclosure Laws Relating to Residential Property Sales: Narrowing the Gap between Existing Laws and Calls for Future Reforms

Abstract

Market failures involving the sale of complex merchandise, such as residential property, financial products and credit, have principally been attributed to information asymmetries. Existing legislative and regulatory responses were developed having regard to consumer protection policies based on traditional economic theories that focus on the notion of the ‘rational consumer’. Governmental responses therefore seek to impose disclosure obligations on sellers of complex goods or products to ensure that consumers have sufficient information upon which to make a decision. Emergent research, based on behavioural economics, challenges traditional ideas and instead focuses on the actual behaviour of consumers. This approach suggests that consumers as a whole do not necessarily benefit from mandatory disclosure because some, if not most, consumers do not pay attention to the disclosed information before they make a decision to purchase. The need for consumer policies to take consumer characteristics and behaviour into account is being increasingly recognised by governments, and most recently in the policy framework suggested by the Australian Productivity Commission for uniform consumer protections laws. The authors will use this policy framework to evaluate current Australian housing information disclosure laws relating to the purchase of residential property. The paper will highlight the policy and legislative assumptions behind the development of those laws and whether those laws are effective in minimising the behavioural biases which cause consumers in the housing market to make errors of judgment. It then will examine the options for strengthening the effectiveness of disclosure regimes in the housing market.