Business Daily Media

Men's Weekly

.

why up to two-thirds of property investors may get it wrong

  • Written by María Yanotti, Lecturer of Economics and Finance Tasmanian School of Business & Economics, University of Tasmania
image

The housing market is moving again. In the past month, national prices have climbed 0.9%[1].

What matters most to buyers (and especially to investors), along with price and value, is location.

The cliché[2] suggests that in the long run that’s all that matters.

So it would be unfortunate if investors were getting it wrong. Our examination of proprietary data from a major bank covering 1.15 million residential mortgage applications over the six years between 2003 and 2009 suggests they might be.

Published this month in the Pacific-Basin Finance Journal under the title Home advantage: the preference for local residential real estate investment[3], it finds that more than two in every three Australians buying an investment property pick one close to where they live.

This means that someone who lives in Manly is far more likely to invest in Manly over anywhere else in Sydney or in Australia and so on.

Read more: Three charts on: who is the typical investor in the Australian property market?[4]

There are several good reasons for this. First, the time, effort and travel costs are typically lower when investing in your local area than investing further away.

Second, property investors sometimes plan to self-manage without an agent, making proximity an advantage. The Real Estate Institute of Australia believes 1 in 5[5] investors self-manage.

And property investors might believe that they have a “home advantage” in knowing their location better than non-locals.

Home bias means eggs in one basket

Home bias is well-documented in other markets. For example, investors in the stock market are more likely to hold shares in Australian rather than international companies.

This is even the case for superannuation funds, who set aside a sizeable portion of their assets for investment in Australian stocks – far more than the Australian stock market would represent in a global stock portfolio.

It brings with it problems alongside the advantages of convenience and local knowledge.

Most investors hold only one investment property alongside their place of residence, making it one of the few chances they have to diversify away from the risk embodied in that suburb.

Instead, most double down on that investment.

Read more: The Game of Homes: how the vested interests lie about negative gearing[6]

If you are wondering whether this is unwise, or unwise enough to outweigh the advantages of local knowledge, consider this question: How likely is it that the location you happen to live in will always outperform every other location?

Interestingly we find that “sophisticated” investors are more likely to invest outside of the suburb in which they live than less sophisticated investors.

Investing non-locally is more likely among investors who own shares, already receive rental income, and work as professionals or in management positions.

And a more fragile financial system

The risks that doubling down on locations impose on unsophisticated investors extend to the financial system itself.

Higher geographical concentration of property investments increase the risk of defaults and foreclosures in a market downturn, amplifying economic cycles.

Australians have a lot of wealth tied up in property, and the property market in turn is highly connected[7] to the financial system through bank lending.

Our study suggests there is an opportunity to strengthen Australia’s financial system by educating potential investors about risk. It could make them, and the Australian economy, better able to withstand downturns.

Authors: María Yanotti, Lecturer of Economics and Finance Tasmanian School of Business & Economics, University of Tasmania

Read more http://theconversation.com/location-location-location-why-up-to-two-thirds-of-property-investors-may-get-it-wrong-121735

Cash vs Accrual: Choosing the Right Method for SMEs

When running a small or medium-sized enterprise (SME), one of the earliest financial decisions you’ll face is choosing between the cash and accrual ac...

Changing the World One Bite At a Time: IKU Turns 40

One of Australia’s first plant-based, chef-led eateries and now ready meal provider IKU is celebrating its 40 year anniversary with the business e...

Three generations marking 45 years in hot-air balloons

Australia’s leading hot-air balloon company is celebrating 45 years in the sky and its 700,000th passenger, driven by the passion of father-son du...

Workplace DMs, Reinvented: Deputy Messaging, Purpose-Built For Shift-Based Teams

Deputy, the global people platform for shift-based businesses, has launched Deputy Messaging, a fully integrated, real-time communication tool designe...

Revolutionizing Fulfillment: How Virtual Warehousing is Changing the Game?

The e-commerce landscape is evolving more rapidly than ever, and the way businesses are managing their fulfillment is also revolutionizing. At the...

SME lender Dynamoney welcomes new CEO, Brett Thomas

Strengthens growth ambitions and signals expanded offering Dynamoney, a leading commercial finance provider for Australian SMEs,  has today appoint...

Sell by LayBy