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How emotion can impact on your investment choices in declining market


Property investment is as emotional as it is strategic. No matter how much rational thought is applied to your choices, there’s still an emotional component that can really derail your long-term plans if you let it. This is the current reality for property owners and investors across the country as the housing market sees its first annual decline in 6 years.  Many Sydney property investors are now scrambling over what to do, as the local market continues its downward climb. Nobody wants to sell in a panic, but hanging on as your investment loses value and your blood pressure peaks, may not be the best strategy either.


Fear is a powerful motivator and for many, the force of it can override all other emotions, leading to decisions that may not be in your best interests, over the long term. Fear can cause knee jerk reactions which, in the case of property investment can result in an untimely sale or purchase, based purely on an emotional reaction to something as simple as the daily news. We also have inherent patterns that behavioural finance experts will hash out in detail, by way of explaining investor activity. Patterns such as the disposition effect, or prospect theory for example – whereby an individual’s choice will always be dictated by the perceived gains they will achieve, regardless of the loss that will come from that choice.


These theories are particularly pertinent where property investment is concerned, as they state that investors tend to gravitate towards a solution that provides them with an immediate perceived gain, regardless of what the reality of the overall loss may be. It’s the classic example of losing $50 then finding $100, but seeing your win as a $100 bonus, rather than the $50 gain it actually is. This is where having a longer-term perspective comes in particularly handy. A smart investor will be able to acknowledge the emotional experience, but still process the facts and figures and potential outcomes; not letting emotion dictate the final outcome entirely. Getting as informed as possible about the facts of the situation and adding time to the equation, ensures the reality of it can be effectively processed. It will also help the decision develop from one of pure emotion to one that considers all aspects of the situation; consideration of the pros and cons right now and into the future will ultimately result in a more comprehensive approach. Clarifying the emotional component and separating it out, enables you to recognise your decision as a fully formed and practical one, rather than simply an emotional and reactive one.


The Australian property market tends to be relatively stable and properties in the inner parts of Melbourne and Sydney generally show resilience over the longer term, largely due to the desirability of their location. Despite the current forecasts, some may consider it too early yet to jump ship and will prefer to sell in the next 3 to 6 months, with more thinking time under their belts. It’s also a difficult market to enter into given the interest only reset period is approaching, so how do you know when to cut your losses?


There is no specific rule of thumb, however you can make educated choices based on the specifics of the property, or properties themselves. The number of properties you have to make decisions about will be an important factor, as will what your original purchase price was, and what’s on the line right now if you sell. If you are highly leveraged after buying in as the market peaked, selling in a declining market may leave you left with nothing but loose change and regret. Alternatively, recently purchased properties, that have a stable tenancy and a good rental yield, may not be at risk at all, allowing you to hang on to them until the market corrects itself. Investments you have had for some time though, may end up costing you money if you hang on waiting for the market to transition into its next cycle. In these cases, as consensus continues to validate the declining state of the market, selling up and realising any gains you may have made to date, may be your most viable option. In any case, understanding the true nature of your potential gains or losses will help inform your decision, and along with some trusted professional advice and guidance, help you to make the best decision possible to secure your financial and investment future.  


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The following advice is of a general nature only and intended as a broad guide. The advice should not be regarded as legal, financial or real estate advice. You should make your own inquiries and obtain independent professional advice tailored to your specific circumstances before making any legal, financial or real estate decisions. Click here for full Terms of Use.


Tags: Buying, property market

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