Common sense, is not so common
30th June 2018
In a slow or stagnant market, there are two choices in property. One is to ride through the tunnel, in the hope there will be light at the other end. This hope is not totally blind, it is born of experience and history. Property always bounces back, it is ‘proven’ historically.
However, the question could then be asked ‘just because history shows something always happened in the past, does that necessarily mean it will happen again in the future?’ Perhaps not. There is a slim chance it may not, and the whole house of cards may collapse.
All one can do is look at a probable outcome. And this shows the odds to be in favour of property, always rising back up following a stagnation.
The other option is to cut out from the deal, and move on.
This requires a fluidity of thought and action. Most people will be stagnant, and chose to stay in the deal, rather than cut lose and move on.
If a deal was purchased in a set of favourable market conditions, and then the conditions change does this mean the deal was bad at the time it was bought? No. This is the nature of investment. Things change and move on.
When the market softens, deals you are in may not be as lucrative, but opportunities will start to surface.
The property market is not like the stock market, you cannot sell with a press of a button. However, it is not as illiquid as many believe. Especially in London.
Currently, we are looking to sell a property at a loss, in auction. The decision to throw this overboard has been made, all that remains is to choose the auctioneer from the options we have shortlisted. This will be done this week. The auction will take place mid July. This means the money will be in, in full, by mid August.
This is a tough decision but one which is correct. Looking at the situation in isolation it does not look good. However, if you open up the framework and view it along with the opportunities on the market currently, you see it makes sense.
The funds released from this sale will be used to invest in a location where the property prices are expected to rise at about 10-15% per annum for the next five years at least. In terms of the expected return on cash, this represents about a 40% return on funds, as these funds will be geared up. The downside risk is extremely low.
Therefore, this is the correct decision. But often decisions like this are not governed by common sense, which isn’t actually that common. They are governed by psychology.
In psychology and decision theory, loss aversion refers to people’s tendency to prefer avoiding losses to acquiring equivalent gains i.e. it is better to not lose £5 than to find £5. Some studies have suggested that losses are twice as powerful, psychologically, as gains.