Purchasing a house is an investment decision where you factor the price, your financial capacity and the long-term value of the property. It is also a consumption decision where the social and emotional side of home ownership takes precedence and influences decision-making.
Psychological biases and personality traits affecting investment behaviour can sway you on which property to buy.
Understanding the behavioural aspects of buyers can help to gain insight into property markets by knowing what makes them tick and also avoid pitfalls that arise from the biases.
Most people are emotionally attached to their homes or the idea of a home. Hence they make decisions based on a lot of parameters which are not exactly financial.
In this article we will list down some of the behavioural motives behind real estate decision making.
RITE OF PASSAGE
Life has written and unwritten rules — something like a guideline that society uses to measure the progression of someone’s life.
Take for example, a newly-wed couple. Upon exchanging of vows, they are expected to move into a home with more space to start a family.
Benchmarking with how grandparents and parents started their family lives may not be applicable today. Buying a house in the city may cost millions of shillings and probably lead you into debt as you take expensive mortgage to meet the standards.
It is advisable to evaluate the decision bearing in mind your finances, motive and long- term rationale of purchasing the home.
There’s prestige in owning land — shows that one is successful and often used as a safety net. As such, many people buy property as an investment option upon making money. Having saved up some money, the next step is to look for investment options and property ranks highly in that list.
Real estate developers capitalise on the behavioural tendencies to attract middle income earners with exquisite features in the houses that symbolise class.
Keeping up with the social pressures of having to show a level of exuberance has been identified as a source of mispricing and speculative bubbles. Make a plan based on your available resources and don’t let the societal pressures lead you into a bad property investment decision.
SOCIAL MEDIA INFLUENCE
Social media has also been proven to influence property buying decisions. More people are running their businesses on social platforms such as Facebook and Instagram and it is in this way that conversations about property investment are birthed.
Advertisements are run on the platforms which have property investment groups that bring real estate investing within reach to many people.
A study by researchers from New York University, Harvard and Facebook found that social media networks can heavily influence decisions about property buying.
The research linked the trend to the ‘Fear of Missing Out’ among the social media users. A person may decide to be more active in the home-buying process upon seeing their friends doing well in the sector.
Landing a deal is what most investors look for and have their ears to the ground to get the best ones to maximise their profits. Discounts from the seller, tax breaks from the government and favourable mortgage rates from financial institutions may influence buyers to invest more in real estate.
With deals, there is a catch as you may be offered a discount in the final price of the house but end up paying more in rates or vice versa. For deals that appear fishy with a suspiciously short time frame, it is crucial to carry out due diligence as they may just be scams.
Buying a rundown house at a throw away price may seem like a bargain but the running costs of repairing and maintaining the property may be higher in the long- run and that can lead you into paying more.
LAND IS SCARCE
A myth that has been perpetuated in the real estate sector is that land is scarce prompting people to buy it more with the belief that it will soon become too expensive to buy. This raises demand among the population and yield better returns for the sellers. But this can lead to a property bubble as demand rises surpassing the supply and prices become equally high.
All investors have a biased view towards the investments they make and cognitive biases, such as over-optimism and overconfidence can explain deviations from rationality.
As a buyer it is important to recognise and act on your predictable irrationality and devise measures to counter them.
The writer is head of sales and marketing, Centum.