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Real estate 3d prezi template
Transcript of Real estate 3d prezi template
Behavioral biases that perpetuate bubbles in real estate
An inefficient market
most people will participate in the real estate market
prices often deviate in the short to medium term from fundamental value due to:
high transaction costs
lack of liquidity
difficulty of arbitrage
inability to short sell
barriers of entry (supply restriction)
pricing effects of behavioral biases are magnified
"Safe as houses..."
What is it?
impacts on people's ability to make predictions
people's ability to see events as likely to happen depends on how easily they can recall specific past information associated with that event
an aversion of deviations from the status quo
lead to under-estimation of risk and mis-estimation of future home price movements
availability bias - likelihood of events is estimated based on how many readily the event and similar ones come to mind
attachment bias - when we become attached to something we tend to downplay the negative aspects of it
Example: people's inclination to gravitate towards images and sounds they are most often exposed to is used in many marketing tactics
Especially in Real Estate
residential real estate especially incite familiarity
for most it will be the most important, personal and familiar financial asset they will own
2011 study by Seiler et al examined homeowners’ opinions on the 12 month forward price movements of their homes compared to homes in other locations
results showed that there was statistically significant status quo deviation aversion
study found that familiarity bias influenced homeowners perceptions of there own house price and growth favourably when compared to houses in other suburbs, countries and even neighbours
This bias means that people will place too much weight to previous price growth patterns, perpetuating excessive growth in a bull market and inability to adjust in a bear market
Australia's property bubble?
Australia is in a housing boom with a 24 year expansion
Sydney's house prices have grown at 15% per annum for the past 2 years
2015 median multiple of house prices to income in Australia is now 6.4 times
Household debt-to-income ratio has risen to an all-time high of 153.8% - totaling $1.9 trillion in household debt nationally
Australia's house price-to-rent ratio has risen 54.9% above long term average
It appears that the Australian property bubble is growing larger and more unsustainable
When you do enter the housing market, be aware of the behavioral biases so that when the bubble pops you won't be left exposed
What is it?
The tendency to seek out information that confirms existing opinions
Tendency to ignore information that refutes beliefs
Classic study of Confirmation bias (Stanford 1979)
“people of opposing views can find support for those views in the same body of evidence”
In the Real Estate market
Increased public discourse (exposure through media outlets) with a focus on asset prices
In the real estate market there is no short selling, therefore; only the optimistic participate.
This drives up the price above the fundamental level
With higher priced assets consumers are even bias toward seeking confirmatory information
The human instinct to conform to the actions of a large group
Herd Behavior in Financial Markets: An Imperial Study
What leads to this phenomenon?
The greater fool theory
Information Cascades: Bikhchandani, Hirshleifer and Welch (1992)
Results of the experiment
Herd Behaviour in recent times
Evident in Real Estate Markets
Menk: "As bankers, we follow the herd"
Yale Economist Robert Shiller
Contradiction to efficient market hypothesis
-Anchoring is the common tendency to rely too heavily on the first piece of information offered when making a decision
Anchoring - Findings
-Galimore (1994) : property valuers anchor on prior valuation information
-Northcraft and Neale (1987)
Anchoring – Prospect Theory
-Prospect theory utilizes the anchor reference point, for which the seller is loss averse in choosing the reference point
-Genesove and Mayer (2001)
-Bokhari and Geltner (2010)
Access to the best investment/industry reports and computational models in the business
Each investment day presents a new set of challenges and that investment technique need refining
What is it?
Overconfidence: We tend to over-estimate our intelligence and capabilities relative to others.