Location, location, location: Why up to two-thirds of property investors may get it wrong.

Saving a deposit is often the biggest barrier to home ownership.

Investment Property Bias

The housing market is moving again. In the past month, national prices have climbed 0.9 per cent.

What matters most to buyers (and especially to investors), along with price and value, is the location.

The cliché suggests that in the long run, that’s all that matters. So it would be unfortunate if investors were getting it wrong. Our examination of proprietary data from a major bank covering 1.15 million residential mortgage applications over the six years between 2003 and 2009 suggests they might be.

Published this month in the Pacific-Basin Finance Journal​ under the title Home advantage: the preference for local residential real estate investment​, it finds that more than two in every three Australians buying an investment property pick one close to where they live.

This means that someone who lives in Manly is far more likely to invest in Manly over anywhere else in Sydney, or in Australia, and so on.

There are several good reasons for this.

Ease of inspections and less travel.

First, the time, effort and travel costs are typically lower when investing in your area than investing further away.

Less hassle if the property is self-managed

Second, property investors sometimes plan to self-manage without an agent, making proximity an advantage. The Real Estate Institute of Australia believes ​one in five​ investors self-manage.

Local “Knowledge” and comfort close by

And property investors might believe that they have a “home advantage” in knowing their location better than non-locals.

Home bias means eggs in one basket

Home bias is well documented in other markets. For example, investors in the stock market are more likely to hold shares in Australian rather than international companies.

This is even the case for superannuation funds, who set aside a sizeable portion of their assets for investment in Australian stocks – far more than the Australian stock market would represent in a global stock portfolio.

It brings with it problems alongside the advantages of convenience and local knowledge.

Most investors hold only one investment property alongside their place of residence, making it one of the few chances they have to diversify away from the risk embodied in that suburb.

Instead, most double down on that investment, they buy where they live.

If you are wondering whether this is unwise, or unwise enough to outweigh the advantages of local knowledge, consider this question: How likely is it that the location you happen to live in will always outperform every other location?

Interestingly, we find that “sophisticated” investors are more likely to invest outside of the suburb in which they live than less-sophisticated investors.

Investing non-locally is more likely among investors who own shares, already receive rental income, and work as professionals or in management positions.

Only 0.04% of Australian own 3 or more investment properties.

The risks that doubling down on locations impose on unsophisticated investors extend to the financial system itself.

Higher geographical concentration of property investments increases the risk of defaults and foreclosures in a market downturn, amplifying economic cycles.

Australians have a lot of wealth tied up in property, and the property market.

Call us and discover why it could be the start of your journey to becoming one of those 100,000 odd people who have 4 or more investment properties all helping you to reach FI-RE Financial Independence – Retire Early

Call me now on 1300 171 000 or 0418792215 or email if you are shy on gil@positiveincome.com.au

Our study suggests there is an opportunity to strengthen Australia’s financial system by educating potential investors about risk.

This article is republished from ​The Conversation​.

#propertyinvestment #location #australianpropertyinvestment #australianpropertymarket




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