The first thing I am going to say about emotion and buying property is that you can’t avoid it. The biggest mistake, therefore, is to think you can make decisions without emotion.
The fact is that our unconscious – or emotional – mind drives us more than we realise. Some psychologists estimate that 80% of our decision making is in fact unconscious, which means that we are being influenced all the time without even knowing it.
We are affected by both positive and negative experiences in our past. For instance, if your parents lost money in a property deal when you were young, you might be super cautious now and never be prepared to pay fair market value for a property.
You might think you are not being emotional here because you are able to discipline yourself to stop bidding. But what’s actually driving you is fear, which is, in itself, an emotion. This won’t cost you in a flat market, but when prices rise, you’ll be left behind.
On the other hand, if you’ve never experienced loss and all you’ve ever witnessed are rising property prices, you might be over optimistic and fail to properly consider the risks when buying. This is the sort of buyer who overpays.
Acknowledging and respecting the role that emotion plays is critical to making good property decisions.
And it’s not just your own emotions you need to be aware of, but those of other buyers too. In particular, an understanding of human behaviour will give you insight into the nuances of capital growth. You see, emotion drives prices up.
Scarcity = rare and in demand
Typical = what most people want, doesn’t need to be rare
Odd – rare and limited appeal
From an investors point of view, one of the enduring features of property as an investment vehicle is its lifestyle component. The fact we live in a property imbues it with so much more meaning than a less tangible asset.
To solely focus on bricks and mortar, or on the numbers, is to ignore the hugely variable factors that impact on performance – human behaviour – in other words, our emotions.
If this topic interests you, you will love my new podcast called The Elephant in the Room, where we explore who is really making the decisions when you buy a property. Look it up on iTunes or click on the link in the notes.
Published: 29 August, 2018
DISCLAIMER: The tips included in this video are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.