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Motivations and Behaviours of Residential Property
Investors in Auckland, New Zealand
20 January 2020
David White
Massey University, New Zealand
Outline of Presentation
• Context
• Research Premise and Methodology
•Literature
• Results
• Interim Conclusions
Context
• House affordability, especially in Auckland is a topical issue in New
Zealand
• Housing is the single biggest expense for most New Zealand
households and comprises the main share of both household assets
and debt
• Auckland is a dominant business and finance centre and accounts for
roughly a third of the national population (Lewis & Murphy, 2015)
• House prices are a significant factor in most measures of housing
affordability
Context
• House affordability (ownership) is on the decline in Auckland
• Housing is a central element of family stability and social cohesion. As
such, access to affordable housing is a key policy issue for New
Zealand (NZPC, 2012)
•Wellington-based central governments have taken increasing interest
in the economic performance of Auckland, which dominates the
national economy (Lewis & Murphy, 2015)
Context
• The impact of investors on house price escalation (and therefore
affordability) is of concern to policymakers
• Investor demand has become a growing factor in the Auckland market
over the past year, and this has exacerbated price pressures (Spencer,
2015)
• Policy has been enacted to mitigate this impact: LVR, Bright Line test
Context
• The market is divided into rental and ownership categories are strongly
linked because the prices in one will influence the prices in the other
(Clapham, 2018)
• Descriptive analysis undertaken in late 2018 shows an overlap and
divergence between the investment and owner occupied categories
Research Premise and Methodology
• The purpose of the research is to study the motivations and
behaviours of in housing in Auckland over the 2008 to 2018 period,
including the institutional context within which they operate.
• This is the qualitative component to the study, the stated preference
of investors, in particular their motivations and behaviours, with
reference to existing theoretical approaches and institutional
frameworks.
• This qualitative study will obtain evidence from investors, market
intermediaries, influencers, and policy & practice institutions.
• 50 interviews, 25 from investors, 25 from the institutional environment
• Survey, via structured interviews, a sample of investors, market
intermediaries and influencers, to test for evidence of the motivational
and behavioural theoretical concepts selected from the literature
• Results reflect the initial phase of investor interviews
• Qualitative methods are required when the goal is to investigate
reactions to a phenomenon and its natural setting, to determine the
participant’s experience and perspective of it (Morse & Richards, 2002)
• The structured interview promotes standardisation in both the asking of
questions and recording of answers, reducing variation in the asking of
questions and accuracy in coding and comparing responses while
allowing some latitude for further questions in response to what are
seen as significant replies (Bryman, 2008)
• Examples of qualitative studies include: Investor motivation via postal
and telephone survey based in NZ (de Bruin & Flint-Hartle, 2003); a
postal survey of the behaviour and motivations of home buyers in the
United States (Case & Shiller, 1996); a survey methodology examining
household buyers’ expectations of future price increases (Case &
Shiller, 1988)
•Semi-structured interviews were used, face to ace as a preference but
with telephone or Skype as an alternative
Research Premise and Methodology
Literature
• As many textbooks about the housing market state, the housing market
can be characterised as an imperfect market
• Traditionally, studies have focused on the consumer's impact on
housing prices, whereas recent research is considering investor
motivations as well (Alexiou, Chan, & Vogiazas, 2019)
• The lack of information, the complexity of the product, the long
production time, the high investment costs and the site specificity are
some important reasons for this statement (Boelhouwer, 2011)
• Assumptions of rationality, defined preferences, perfect information,
budget constraints, and insatiability do not apply fully apply to housing
because purchasing housing is emotional as well as rational
• Many features of the housing market challenge efficient market
assumptions, such as infrequent and costly transactions, complexity,
heterogeneity, and long lead times (Clapham, 2011)
Literature
• Limitations to this rationality, referred to as ‘bounded rationality’ in
individual actions that potentially undermines an efficient market and
efficient pricing (Conlisk, 1996)
• The consideration of behavioural impacts has been seen to have
relevance to household consumption, including housing (Wilkinson,
2007)
• Behavioural impacts could be utilised to incorporate factors not
captured in neo-classical approaches such as speculation and
subjective motivator aspects within house-type decisions (Henny,
Peter, & Kees Van, 2002) (Boelhouwer, 2011)
• At the core of behavioural economics is the conviction that increasing
the realism of the psychological underpinnings of economic analysis
will improve economics on its own terms…This conviction does not
imply a wholesale rejection of the neoclassical approaches to
economics based on utility maximisation, equilibrium, and efficiency
(Camerer, Loewenstein, & Rabin, 2003)
Literature
• A North American study failed to account for more than one fifth of
house price variation between 1996 and 2006, by reference to
fundamentals. They therefore suggested that there was a gap in the
explanatory framework associated with “the interplay between bubbles,
beliefs and credit market conditions” (Glaeser et al., 2010)
• A study of three cities in the USA provided evidence that investors in
housing markets “tend to interpret events in terms of hearsay, clichés
and casual observations”, and “it is certainly plausible that expectations
heavily influence the prices people are prepared to pay in these
markets” (Case & Shiller, 1996)
• In a NZ context, studies have looked at the impact of members of the
household on the purchase decision from a motivational rather than
strictly rational perspective (Levy & Kwai-Choi Lee, 2004); the
existence of ‘animal spirits’ in the housing market has been considered
(Shi & Kabir, 2018); and a survey of the behavioural aspects of
housing investors (de Bruin & Flint-Hartle, 2003)
Literature
•The non-rational elements of housing market pricing can be broadly
grouped into themes: “over-optimism and the risk of regret;
momentum; inflation mistakes; and disposition effects (people dislike
making losses more than they enjoy making gains)” (Smith, 2011)
• Biases such as anchoring and framing were of relevance, as well as
contextual effects could have an impact in the housing market
(Simonsohn & Loewenstein, 2006)
• Housing bubbles are “driven by home buyers who are willing to pay
inflated prices for houses today because they expect unrealistically
high housing appreciation in the future” (Himmelberg, Mayer, & Sinai,
2005)
• The assumption of full rationality is challenged when heuristics are
adopted by individuals to simplify decisions within a frame of
uncertainty. (Gibb, 2009)
Literature
• System-level outcomes are generated through a series of linked action
situations that exist in both public and private realms of activity and
generate both upward and downward causal processes (Ostrom,
2007)
• The housing system is highly contextually-shaped; local institutions
matter to the way it operates and these institutions evolve and change
dynamically (Gibb, 2009)
• For the analysis of property markets today, institutions are considered
relevant where transaction costs or other imperfections are added into
the mainstream economic model (Kauko, 2001)
• The complex impacts of mortgage finance liberalisation, tax policies
(on land development and house purchase), household income
dynamics, and demographic processes (including migration) have an
effect on house prices (Murphy, 2014)
Literature
Biases
• Use of reference levels in determining investment decisions such as
asset types, timing and pricing (refence/linking bias)
• What are the key comparative factors that determine whether price is
appropriate (anchoring bias)
• Influence of other market participants, use of lead and lag indicators,
influence of perceived market sentiment (herd instinct bias)
• The type of risks that are actively considered and monitored (loss
aversion, disaster myopia)
• Benchmarks used to assess performance (framing bias)
• Factors that influence assessment of past performance and influence
on future decisions (choice framing, status quo bias, endowment
effects)
Literature
Heuristics
• Use of analytic techniques or heuristics in decision making and relative
importance (deviance from rationality / fundamentals)
• Sources of information and justification for use (use of approximations
and opinions rather than data)
• Heuristics consciously being used in practice (‘rules of thumb’ in
common use and level of influence)
• Perceptions of complexity in decision making (use of unconscious
heuristics)
Literature
• Stated preference in terms of motivations for investment decisions
• Extent of endogenous or exogenous influence and locus of control on
motivations
• Which institutions provide information that influence expectations, and
how and to what extent does this information influence expectations
• Basis of determining reasonableness of return (hedonic framing of
expectations)
Motivations and Framing of Expectations
Results
• Reliance on Heuristics over detailed analysis (certainly compared to
valuation and investment methodologies that we teach)
• Reliance on subjective rather than objective evidence
• Low levels of risk aversion, especially as to (objectively) high impact
risks such as interest rate increases or potential market downturn
• Evidence of herd bias, especially in less experienced investors
• Prevalence and impact of subjective / biased institutional influences on
expectations, such as peers, media, real estate agents, social media
influencers
• Influence of more objective institutions (banks, government policy) has
lower impact on expectations
• Strong framing bias on past performance of the market (stated for most
respondents as 80% reliance or more)
Results
• Evidence of Anchoring bias in terms of the trajectory of house prices.
• Heuristics include retrospective trends, Government Valuations,
locational preferences, value-add risk management
• Biases towards an assumption of capital gain, including framing,
optimism, status quo and anchoring biases
• Oversimplification of the complexity of the market, the value of
analysis, and the potential for exogenous factors to influence returns
(especially capital gains)
• Perceptions of high levels or control, despite reliance on exogenous
factors such as interest rates and price escalation
• Risk perceptions are not focussed on returns, but rather on matters of
control and convenience (tenant behaviour, regulatory policy in areas
of compliance and tenant rights)
Initial Conclusions
• Strong evidence of bounded rationality in investment decision making
of residential property investors in Auckland
• Predominance of an expectation of capital gain and wealth generation
within motivations, rather than income return
• Use of heuristics over objective analysis is prevalent, especially with
less experienced investors
• Expectations of capital gain largely based upon biases rather than
empiricism or objective analysis
• Low perception of the risk of exogenous adverse impacts
• A few unexpected themes, in particular altruism (though perhaps with
an expectation of reciprocity)
• Rising influence of social media, peer influence, ‘crowd sourcing of
expectations’
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