‘Don’t judge a book by its cover’ is just as true in astute property investment as it is in life. Humans have an innate tendency to form strong, often lasting, opinions based on an initial visual interpretation of something—the ‘first impression’. Doing so can mean overlooking a good opportunity or worse – making a decision which we later regret.
Letting our first impressions cloud our judgement is especially fraught in property investment. Over-emphasising the visual at the expense of the practical is a common pitfall that has seen many new (and plenty of experienced) investors lose hundreds of thousands of dollars in returns over time.
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Psychologists call the phenomenon of making positive assumptions about a person or thing’s character (or value) based on its appealing visual presentation the ‘halo effect’. A person judges what they see within the frame of reference of their first impression and tend to cluster characteristics together within that context. So, if they like what they see, they tend to have a favourable bias towards it.
When it comes to property, if a potential investor likes the look of a place based on its aesthetics, they will tend to assess its other attributes, such as future capital growth, positively. In other words, they will persist in seeing it in a good light and tend not to think dispassionately about it. This can be a big mistake.
The ‘touch and see’ nature of property is very seductive (and is a major reason why so many investors pursue property over less tangible investment alternatives, such as shares).
As professionals who are involved with investors and property all day, we see this all the time. Investors prioritising visual appeal over more important considerations (like whether it is low maintenance, structural integrity, and crucial economic considerations).
Pointers On Making Practical Decisions
Think about it: the difference between 6% and 8% average capital growth per year on a $450,000 property equates to $165,000 over ten years. That 2% is well worth thinking rationally, but how do you do it when a favourable first impression is tugging on your heartstrings?
To win with property, you have to look beyond its beauty and see the real deal. It can’t be a superficial decision. Keep in mind that a property is a static commodity – it doesn’t grow, it’s not a tree. Economies grow. View property as a financial instrument and (first) evaluate the potential for economic growth of that community.
- Step back and look at the property market from a macro level – Australia is a big place with 550 city councils spread across eight states and territories;
- Don’t analyse a property for its bricks, mortar and what’s within its walls. An astute share investor would not buy stock because they like a company’s logo or products. And so it is with property: don’t buy a property because you like using flick-mixer taps or hanker after a heritage facade. Think about what happens when the inevitable wear and tear reduces the property’s good looks. Ask yourself how important are caesar stone bench tops or mirrored mosaic tiles?
- Look at the property’s long-term potential within the context of the local economy, population trends, where the governments of the day are leading us, supply and demand, and other important indicators of a good investment decision;
- Realise that, as an investor, your objective is not to buy the nicest looking property; it is to maximise the return on your money. The property’s aesthetics will have some impact on its going price now, but will have negligible effect on how the property performs in the future. Often, the nicest looking properties today have the ‘nicest’ price tag. But, how will the property look after 10-15 years of wear and tare as tenants come and go? This doesn’t imply that you should look for an ugly duckling, rather to ensure that you aren’t paying an unreasonable premium because of short-lived appearances. In the same way that a nice looking property can be ‘high maintenance’ a property with a dated interior can still be structurally sound and ‘low maintenance’. Remember, the time when appearances count most is when we are about to sell.
Location, location, location…
The ‘noughties’ decade saw property values increase at unprecedented rates world-wide. We were also bombarded with property information from the internet and a tonne of lifestyle and home improvement shows, often screaming the message: location, location, location.
Understandably, a lot of people ran with that message and assumed a ‘good’ property buy was one in a ‘good’ location. But, what actually constitutes a good property investment location? Unfortunately, for many people, they judged a good location to be one in which they could see themselves living and purchased property for its popularity given the schools, shops and cafes nearby, its proximity to water, the attractiveness of its view or the general aesthetic or ‘look’ of the property.
If these criteria were the sole drivers behind their investment decision, then the investor undoubtedly overlooked much more crucial considerations. For instance, there are always factors such as these at play:
Queensland’s Gold and Sunshine coasts offer some of the best lifestyles in the world, yet their unhealthy reliance on tourism, combined with an economic downturn, saw them fall in grace to be among the worst performers in Australia for several years;
Formal studies conducted by Propertyology suggest that the investment performance of apartments in large complexes (offering modern fit-outs and views) have been significantly inferior to those of well-chosen older apartments in smaller complexes in the same areas;
There’s a big difference between ‘desire’ and ‘demand’. The world is full of desirable places to live however, most people can’t afford to live there. Historical evidence confirms that highly desirable locations like Bondi haven’t performed as well as lesser-known locations like Narrabri. Affordability plus employment opportunities provide the highest demand;
Personal preferences are very subjective. People where different clothes, drive different cars, eat different food, and have different hair styles. Where different people choose to live is just as subjective. Whether one elects to live in Albury, Airlie Beach or Alice Springs is just as subject as ordering trout, tofu, or t-bone.
During the last decade, when locations such as Brisbane produced an average increase in median values of 11% per year, most people would have made significant money regardless of the property they purchased. But, this current decade is a very different ballgame. Reactive governments with limited finances, significantly higher rates of housing supply, and the exciting (and ever evolving) Asian Century create a different investment landscape.
There are more than 9.5 million residential properties in Australia and some great investment opportunities. But, investors can’t let the unprecedented results of the last decade lull them into a false sense of security. The days when investors could buy on gut-feel and watch their property double in value over the subsequent decade are gone.
Skill in property economics is needed to find opportunities. And that skill isn’t about spotting a good-looking property or a restful waterfront location. Driving around an area on the weekend, looking for cafe strips, streetscapes, or proximity to train lines does not constitute ‘property research’. Spending a few hours on the internet to see which properties take your fancy will not cut the mustard either.
