Stefan’s weekly: Residential Real Estate Investments / Social Proof

Dear Ladies and Gentlemen

People tend to consider actions of others to reflect correct behaviour. This psychological and social phenomenon happens all the time and is known under the name of “social proof”. Social proof is believed to be particularly prominent in uncertain social situations, which means situations during which people are unable to determine an appropriate mode of behaviour. It is furthermore driven by the assumption that the surrounding people enjoy more knowledge about a given current situation.

One explanation for social proof is that thousands of years ago, when people were still hunting in groups to feed their families, at a given moment a risk could emerge (i.e. some dangerous animal was trying to attack the hunters). During such events it seemed less risky to act like the other hunting-cohort members (i.e. running away) than trying to find out what the real issue was, risking, ending up as a snack for the dangerous animal. The effects of such social influence can also be referred to as “herd behaviour”.

Now, Ladies and Gentlemen, why would I be writing about this?

The reason is that in the investment industry herd behaviour may lead to decisions that are either correct or mistaken and I have the impression that today we are in a situation where herd behaviour can be detected in the residential real estate business.

During the last years of decreasing interest rates, real estate investments were among the only investments that would yield positive investment returns. Not only were they generating rental income but because the hunt for yield was pushing asset prices (thus also prices for residential real estate) up, the valuation of residential real estate portfolios went up as well. For pension fund managers and very wealthy individuals this was what I would call a double yummy. Now, unfortunately this very special situation seems to be over soon. Yields are going up, slowly for the time being but still the direction is not pointing south anymore. Eventually this will have a negative influence on the valuation of residential real estate investments and if, like in some areas of Switzerland, excess capacity is building up, valuation may even get a real hit.

Furthermore, as soon as the large cohorts of baby boomers will hit retirement age, at least some pension funds will be forced to liquidate residential real estate investments in order to generate cash but who will buy such investments at a time when demographic change will lead to dissaving of pension schemes?

There may come a situation where a lot of people seek exit through a small door. You know what I mean, right?
This is not imminent you may say, and I think you are right, but I think it is worthwhile keeping it in mind when considering entering this field.

And as always, Ladies and Gentlemen, if you want to share any of your thoughts with me, please feel encouraged to do so but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend!