Facts versus feelings in property markets - July 2019
Many smart property investors believe they rely entirely on the facts, and easily ignore feelings as a measure of market potential.
It makes sense on the face of it. Someone who’s in the game to build wealth should rely on cold, hard metrics. That well-trodden path to success is lit by those established fundamental drivers of capital gains.
But what if I told you that, in reality, some of the most successful property traders I’ve met use a measure of intuition when making major financial decisions? They strike a balance between facts vs feelings.
You must be able to track the ‘heart’ of the market if you want to optimise your chances of a great outcome.
Homebuyers have heart
How many property investors do you think are active in markets across Australia?
I did a straw poll on this at a friend’s backyard barbeque just prior to the election, when talk about negative gearing proposals were reaching fever pitch.
Among this cohort of average Aussies, the answers were all somewhere between 20 and 40 per cent.
That isn’t even close.
Based on ATO data from 2016, approximately eight per cent of Aussies own an investment property – and the vast majority of those only have one holding. In fact, if you look at the percentage who own two or more, it drops to just two per cent of our total population.
This means the largest proportion of those who purchase real estate in this country aren’t just looking for an asset – they’re looking for a home.
They’re looking for their first abode, for a place to live with their spouse, for somewhere to raise a child, for their absolute dream or for somewhere to grow old.
All of these dwelling-related decisions are driven in some way by emotion. I personally think it’s a big part of the equation for many. People search and search, before falling in love with a place and working to buy it. That’s perfectly normal.
So, there’s already a lot of feelings playing their part in our markets. Choices to purchase are being made every day based on ‘the vibe’ of those looking to settle down. This is definitely an element worth taking into consideration when you choose to invest in the property sector.
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Feelings influence facts
I like facts. They’re reliable, easy to read and based on science.
Supply and demand drive price growth.
Population growth, the economy and changing demographics, to name a few, help determine demand.
Developer activity, construction costs and current buyer activity are some of the factors that also drive supply.
These measurable metrics appear to be ‘fact’ based, however, look below the surface and you’ll see that they are propelled in a major way by feelings.
Market sentiment and buyer confidence help to dictate both demand – the number of people out and about looking to purchase, feeling good about moving now – and supply – the willingness of developers to build and vendors to sell for a good price.
As you can see, intuition is playing its part in finding balance on the value scale and opportunity knocks for those who can read both sides and sniff out the best prospects.
Examine the full picture
Let’s say you use data to find a suburb where prices have slipped over the past two years, since the end of the boom and the beginning of the correction. You don’t have to look too hard – there are a lot of them around in Sydney.
The mistake of not looking at sentiment is in assuming that all suburbs that have gone down must eventually come back up – because that’s how facts work. Everything is cyclical.
But by studying buyer sentiment, you might find a particular suburb that’s softened over the past two years was growing at a consistent rate beforehand. Population was on the rise and the demographic had shifted, sparking good demand. People felt positive about it as a location.
It might be safe to believe that those kinds of areas will rebound well when the market bottoms out and begins its recovery.
Facts for the now, feelings for the future
In truth, we examine facts so we can form an opinion (or in other words, ‘feelings’) about the future of particular locations, property types and price points.
If you’re studying demand in a suburb, you are trying to determine if the reasons people are drawn to the area will continue to help population growth gain momentum.
Similarly, if you’re studying supply, you must determine if builders and developers feel confident their product will find buyers without oversupply becoming an issue.
While I lean on facts to help form my opinion on market direction, there’s no denying that decades of experience have taught me to rely on my instincts when it comes to predicting market direction.
At some stage, you must back yourself to make the call. That’s what professional buyers’ agents do best – take in the facts, gauge their feelings and move with confidence.
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