If they’re armed with all the research available in today’s information age, why can’t economists agree on where our property markets are heading?

In fact, a better question would be – why do so many get it wrong?

The simple answer is those market movements are far from an exact science.

Mindset

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.

And that’s what’s really been behind market movements of late.

Last year when all the news was good and we were feeling confident that we had this coronavirus thingy licked, investor sentiment was positive and it led to strong economic growth and property a booming property market.

On the other hand, for much of this year they’ve been worried by the barrage of negative sentiment surrounding the uncertainties about rising inflation and interest rates and this negative sentiment has led both buyers to go on strike.

We’re not rational

I’ve found that investors often suffer lapses of logic when investing and many of their investment decisions are driven by emotion.

For example, we tend to extrapolate the present to the future.

When things are booming we tend to think the good times will never end and when the market mood is glum, we have difficulty seeing the light at the end of the tunnel.

Think about it…when the media is full of reports about property prices falling and an impending housing crash, many investors become scared and sit on the sidelines, believing the end of the 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.

Other emotional traps include becoming overconfident, wishful thinking and ignoring information that conflicts with your current views.

In other words, many investors make their own “reality.”

Can you see how investor psychology, drives booms and busts?

Can you see how the dominant investor mentality of the time helps drive the property cycle?

Just to make things clear…home buyers, who make up around 70% of property transactions drive our property markets.

But investor activity creates our booms and busts.

Simply, over the last couple of years, investor frenzy driven by Fear Of Missing Out drove the property markets in Sydney and Melbourne to dizzy heights.

Fomo



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