To what extent do investors determine real estate prices?

To what extent are real estate investors responsible for the rise in real estate prices? A lot, according to new doctoral research by David White of Massey University.

He added that while investors were often singled out – including by the government – ​​as a reason for rising property prices, no clear evidence had previously been presented to demonstrate that this was the case.

He wanted to check whether houses were overpriced and whether this was due to investor activity. He said he was able to confirm in his thesis that both were true.

“Investors were selected as a segment of the market that is most likely to base their decisions on financial factors such as return on investment rather than non-financial factors that owner occupiers may consider, such as emotional attachment to the neighborhood.

“In this regard, it is to be expected that investors will focus more on fundamental value. Investors have also been selected because there has been considerable public discourse – and macroprudential policy changes on the part from the Reserve Bank – suggesting that the rise in house prices can be attributed to their activity.”

He said research found investors were often motivated by the expectation of capital gain.

When this amount was overestimated, they might overvalue a house and be willing to pay more for it.

“My research found sustained overvaluation on the part of investors, caused by overestimation of capital gains and underestimation of market downside risks.”

This is because investors rely on past market performance rather than considering whether it is likely to be sustainable in the future, he explained.

“This leads to procyclicality in prices, reinforcing upward price momentum.”

White talked to investors about shortcuts they might take in their decision-making and discovered they all had a bias toward rising house prices.

“People said ‘house prices always go up’ and there was this fear of missing out. My thesis examiner said it was the least surprising result ever…everyone hears anecdotally that investors are driving up prices, but there hasn’t been a lot of really solid evidence.

“If you look back at the yields and the rising prices, it becomes self-fulfilling because the expectation of a capital gain means you pay more.”

Investors often said they were trying to pay the lowest price for properties, but White said that didn’t show up in the data because that type of behavior would drive prices down.

He said the research highlighted that the banking sector had a role to play in placing more emphasis on objective analysis and valuations rather than a reliance on past property prices and algorithm-based valuations in a rising market.

“For many investors, access to debt financing is a prerequisite to purchasing and limiting access to funds to purchase at potentially inflated prices should help.

“For policymakers – including the banking industry, valuers and investment advisors – it is our duty to think about methodologies that identify deviations from fundamental values ​​rather than a heavy reliance on past performance of the walk.”

Sarina Gibbon, chief executive of the Auckland Property Investors Association, said White’s research appeared to describe speculators rather than investors.

“A speculator buys based on potential value hoping that natural market forces will do the heavy lifting so he can sell at a profit. An investor buys based on a balance of value and return, knowing that what What makes the property worth it is the regular reporting of rents.

“As for investors (or speculators) being bullish and paying more, I would say that in my nearly 20 years in the industry, I have never heard of a single investor looking to pay more for a property.”

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