Financial decisions are what investments should be. In finance class, we learn models for evaluating and deciding on investments.
In reality, however, most people make investment decisions based on emotion. Real estate is a better investment. Most people have an emotional attachment to their home or the idea.
They make decisions based on several factors that are not necessarily financial or mathematical. This article will discuss some of the behavioral factors that influence real estate decisions.
The Rite of Passage of Buying Property
Most people invest in a property as an emotional investment. It is especially true for young people. Couples and individuals in their late twenties to early thirties are among the fastest-growing segments of homebuyers. People who are just getting married or about to get married are included in this group.
They buy a home because they think it is a sign of adulthood. Their parents and grandparents purchased a home as soon as they got married, and they associate purchasing a home with starting a new family.
The act becomes a rite to enter family life. The developers know this trend and design marketing campaigns that appeal to these emotions. Successful real estate investors understand that investing in property is a financial affair. Involving family members in the investment process can complicate and lead to poor decisions.
Everyone else is buying a property.
Many people see buying a home as a sign of prosperity. After they graduate from college and get a relatively stable job, they are one of the very first people to buy a house. It is because emotions play a role in making investment decisions. They view purchasing a home as a public declaration that their life is successful.
So, the house becomes a symbol of success. Once again, developers have recognized this trend. They have therefore built suburban homes with luxurious amenities for middle-class families! The goal is to make the middle-class buyer feel successful and confirm their emotional decision.
A Property Purchased Because of Past Millionaires
In most of the world, except for a few places, there has been a boom in real estate over the past two decades. People who owned large tracts of farmland suddenly became wealthy because their land became valuable. With the increase in urbanization, those who own extensive farmlands have become extremely wealthy.
It has also spawned a new class of wannabe investors who want to replicate the process. One significant difference exists. They expect that the price of real estate will continue to rise at the same pace as it did in the past. Anybody familiar with economics or real estate, in general, knows that high-speed exponential growth can only last for a while. Globally, the outlook for real estate is a bearish one. The emotion of greed makes these investors believe that markets will rise forever. Their decisions are based on something other than sound financial analysis. Instead, they are driven by emotions and the adrenaline that comes with quickly making a large amount of money.
Tax Advantages in Purchasing a Property
Tax advantages are another reason that many middle-class buyers buy homes. Many governments offer tax breaks to home buyers. The borrower can deduct the interest and capital paid towards the mortgage from their income. This reduces the payment and tax due!
Investing in real estate is a great idea. It is possible to get some cash flow and capital appreciation. It also allows investors to save because they have a lower tax bill.
In reality, this is not true. The tax breaks provided by the government pale compared to the mortgage interest. If we take a financial view, purchasing a house may not be the best decision. Investors are attracted to the perceived tax breaks because they make them feel good.
The Land is scarce, so you should buy a property!
Developers also exploit the public’s fear that land is limited and that the world population is increasing. So, falling supply and rising demand should lead to an appreciation. This argument needs to be revised in several ways. Despite massive population growth, there is still enough land to house everyone. This can be done multiple times! We are not even close to a supply crisis. The demand for real estate will also not increase at the same rate as in the last few years because the global population has stabilized. It is not a good argument to purchase land now because there will be none left in the future.