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What Does Confirmation Bias Have To Do With Real Estate?

What Does Confirmation Bias Have To Do With Real Estate?
April 20, 2020 Simon Pressley

Whether about real estate or anything else in general life, I’m sure we’ve all had moments when we’ve been talking about a topic that we know a lot about it, but the other person doesn’t want to have a bar of what we’re saying.

The reason for the disbelief may be a refusal to overcome a personal confirmation bias.

Bias comes in several different shapes and sizes but, according to Psychology Today, this particular bias involves embracing information that confirms one’s own point of view while simultaneously ignoring or rejecting information that casts doubt on it.

Thus, confirmation bias suggests that we don’t perceive circumstances objectively.

Rather, one picks out bits of information that make them feel good because it confirms one’s unique prejudices.

However, this bias can make people prisoners of their own assumptions.

A refusal to set aside personal prejudices suppresses personal development and adversely affects decision-making. This is especially relevant when it comes to key financial decisions like investing in property.

 

Property Investment Bias

Making big decisions such as which town or city and exactly what property to invest in based on a personal bias totally defies the primary purpose of the original decision. It is foolish.

It’s not as if ‘barracking’ for a specific property market to perform well (or yelling loudly about it) will actually influence what eventually happens. Surely no one can seriously think that’s possible.

Unfortunately, it seems to suit the human race to believe what they want to believe.

This can lead to people gravitating towards information that supports what their subconscious wants, which often is not in their best interests, especially financially.

For example, who doesn’t want the property market of their home city to perform well?

So, when a hometown hero investor conducts what they consider to be “research” – which really means “reading all kinds of stuff online” – they feel more comfortable when they come across something positive about where they live.

An online report containing details about planned and proposed infrastructure projects in one’s hometown often is all the confirmation that one needs to reinforce their confirmation bias. The report gives them all of the information they need to support why it’s a good idea to buy an investment property that’s a short hop, skip and jump from where they live.

Little do they realise that every year gone by also had an infrastructure project list, but the property market of their hometown didn’t always perform well. No one location always performs well and there are many (many) factors more important to future property market performance than infrastructure projects.

A recent set of population figures or a very general report with a local real estate professional (unsurprisingly) talking positively about their local market are other common feeders of a confirmation bias.

So, the default behaviour of a resident of Sydney or Melbourne, or anywhere else really, is to cling on to a fairy tale that their local property market will always perform well.

For example, property market fundamentals from 2015 onwards for Australia’s two biggest capital cities where already showing signs that there was a stress on the horizon (affordability constraints plus a fast-growing housing supply pipeline), while numerous other locations in completely different parts of Australia had a set of fundamentals suggesting good times were ahead.

Yet, instead of maintaining an open mind and objectively reviewing fundamentals of all locations, many buyers got absorbed by their confirmation bias and bought an investment property locally.

A few years later, confirmation bias meant that tens of thousands of investors completely overlooked Australia’s best-performed markets – locations such as Hobart, Orange, Ballarat, Bega, Burnie, Launceston, Geelong, Cooma and Griffith to name but a few.

Lots of real estate sales professionals are renowned for always finding a way to talk up their local property market.

They probably own property there themselves so, naturally, they want it to do well.

And the odds are that their business model depends upon consumers buying and selling locally, so there’s a vested interest for them to publicly talk up their local market.

Some also go to lengths to talk down the property markets of other locations as if it’s “competition” to them. It’s like they see real estate as a sport – meaning that they either barrack for ‘their team’ or boo the opposition.

That’s why it’s vital to look out for reports wherein a so-called property expert, who lives in city ‘Y’ always has a positive spin on the property market of city ‘Y’.

Conversely, if city ‘Z’ is gaining popularity amongst savvy investors, they’ll go out of their way to publish a negative spin on city ‘Z’!

For me personally, barely a day goes by without participating in at least one media interview and I’m always objective and honest when asked questions about the property market of any location in Australia. I doubt there’s been a bigger critic of the property market of my hometown, Brisbane, than myself.

 

How To Overcome Confirmation Bias

I have no doubt that following one’s confirmation bias as a property buyer is a recipe for disappointment and frustration.

Believe me, I fell victim to it myself several years ago. I also learned my lesson.

The first way to overcome one’s own confirmation bias is to recognise that one has one. We all do.

Just ponder for a minute how you might feel if, several years after making a confirmation bias decision to spend hundreds of thousands of dollars on one asset, you recognise that many other locations performed well while your asset performance was underwhelming.

Be objective and true to yourself.

Make a conscious effort to ignore your bias. In a country that has 185 individual towns and cities each with a population of 10,000 people or more, the odds of your hometown having the best potential are very slim. You can admit that, right?

Ultimately, someone who invests to satisfy a personal feeling probably shouldn’t be investing at all!

We all have feelings, but everyone’s feelings are different. If everyone had the same likes, dislikes, skills and priorities we’d all be living in the same city and in a property that looked and cost exactly the same.

When done well, investing is a decisional process with the primary objective being a financial outcome, not a feeling.

While no one can guarantee a future financial outcome, the smartest (and safest) way of giving oneself the best chance of being happy with future financial outcomes is to put your confirmation bias in a box and leave it there.

We walk-the-walk. Here’s a recent example of our work for a client:

Propertyology is Australia’s premier property market analyst and award-winning buyer’s agency. Every capital city, every non-capital city, we analyse fundamentals in every market, every day. We use this valuable research to help everyday Aussies to invest in strategically-chosen locations (literally) all over Australia. Like to know more? Contact us here.

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