The psychology of investing: house prices and fear mongering

Last weekend, The Australian newspaper published the blog I sent you last week where I predicted that the property market is close to the bottom and that prices next year would either be unchanged or improve slightly. Well, that article received over 60 comments and none of them were complimentary or supportive of my prediction. Upon reflection, I wanted to share some very important comments and observations.Be aware of the story you are telling yourselfI am almost certain that 95% of the people that commented on my article have never invested in property and probably never will. They desperately want to prove that their decision to not invest was correct; “See, the market is about to crash. That’s why I didn’t invest!”. So, when there’s an opportunity for support the idea that investing in property is destined for failure, they jump at it.Successful property investors tell themselves a story too. Most investors will say that the market will be fine in the long run so there’s nothing to worry about – it’s all just media hyperbole.With this in mind, I would like to make two points:Be careful that you don’t fool yourselfOnce you understand that humans are susceptible to only seeing things (data, media, ideas, etc.) that validate the story we are telling ourselves, you must be careful to not be too one-eyed. One of my favourite sayings is “hold strong opinions, loosely”. Always leave room for the idea that your story could be wrong.Be careful who you listen toIt is interesting to note that the economists that don’t invest in property themselves (personally) tend to always hold negative views about the property market. The ones that do invest in property tend to be more balanced. Also, negative property views make perfect clickbait and some commentators have built a career out of holding perpetual negative views – because it garnishes media attention. So, be careful who you listen to.In short, people that voice very strong views tend to do so to defend (validate) past decisions.The chorus is getting stronger for a loosening in credit policyEven over the past week, the chorus of people that are saying that credit is too tight has been growing and getting louder. Business leaders, economists, RBA and media are all saying that it’s a threat to the wider economy, not just property. My view that credit will loosen in 2019 becomes firmer as the weeks pass.Negative gearing might not even be banned if the ALP winsLast week Bill Shorten said that he may delay the implementation of negative gearing until as late as mid-2020. This is the first time that Mr Shorten has hinted at a possible delay. Perhaps the ALP is slowly backing away from its policy especially in the face of a weaker property market.The cash flow impact is totally offset by low interest ratesI make this point mostly as an interesting observation rather than trying to make a water-tight financial argument. It is interesting to note that the cash flow cost of a $650k investment property with no negative gearing at current interest rates is still less than when rates were 7% p.a. with negative gearing.<Our most popular free guides:Over the years we've written hundreds of articles. These three bring our best thinking together on the topics that matter most right now: choosing a super fund, debt recycling, and navigating the new tax changes.Download them hereMy new book, Wealth by Design, is out now:Buy online or in bookstores. The ebook is available now, audiobook coming soon.Got a question for the podcast?Email us at [email protected] in working with our team?Discover how we can work togetherSubscribe to my weekly blog:Stay connected hereImportantThis podcast provides general information about finance, tax and credit. It doesn't take into account your specific objectives, financial situation or needs, so you need to assess whether it's relevant to your circumstances before acting on it. If you're not sure, speak to a licensed, trustworthy professional.