In Australia we seem to have 25 million property experts – everyone has an opinion.
You know what they say about opinions… there like belly buttons; everyone has one
but they’re basically useless.
Of course, even property experts tend to get it wrong despite being armed with all
the research available in today’s information age.
The reason is those market movements are far from an exact science.
The fundamentals are easy to monitor. Things like population growth, supply and
demand, employment levels, interest rates, affordability and inflationary pressures.
However, one overriding factor that the experts have difficulty quantifying is investor
sentiment.
Currently, investor sentiment is low, in fact, the lowest it’s been for decades, despite
the economic fundamentals being quite solid.
Unfortunately, even the most rational of us tend to suffer lapses of logic when
dealing with money and many of our investment decisions are driven by emotion.
Think about it…
When the media reports falling property prices or an impending housing crash, many
investors become scared and sit on the sidelines, believing the end of property is
nigh and things will never improve when, in reality, much of the risk has been
removed from the market.
Conversely, when property markets are booming and stories of investors seemingly
making large gains overnight abound, people want to jump on the bandwagon and
cash in; often at a time when the market is near its peak.
You’ve heard me say it before, as a supposedly rational being, humans tend to
act irrationally when it comes to money.
Other emotional traps we experience include becoming overconfident, wishful
thinking and ignoring information that conflicts with our current views.
In other words, many investors create their own “reality”, but unfortunately,
I’ve come to realise that “the crowd” is always wrong.
When there is a general belief that property values can only keep rising and this
spreads through a new generation of investors (as it does each cycle), driven by
FOMO (the fear of missing out) they drive property values up even further,
perpetuating the belief and helping make it a reality!
Similarly, when “the crowd” believes the real estate market is going to crash,
FOBE (the fear of buying early) keeps them out of the market, and their
negative sentiment gets reported in the media and feeds on itself.
By Michael Yardney
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