The paper evaluates the usefulness of behavioural perspectives adopted in finance for understanding the basis on which a significant group of consumers form their expectations of qualitative changes in interest rates. Economists and financial analysts mostly neglect the "same" or "no change" category in consumer surveys, yet as a group it exhibits interesting systematic behaviour. A behaviour based model of the formation of interest rate expectations is developed and tested. The application of non-parametric statistical analysis (Loess) reveals that many consumers make inefficient forecasts of interest rate changes. However, there is a case for adopting complementary rational forecasting and behavioural approaches to understanding expectations formation. There are important implications for real estate finance and housing and mortgage demand, including a possible explanation of perverse mortgage prepayment behaviour.

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