Can investors not afford firesales or just dont want to engage in them?

Property prices  in Ireland have dropped precipitously  and yet we still see few (apart from those that Alssop Space) enough investment properties (buy to lets) coming on the market deeply discounted. A fascinating study (firewall alas)  suggests that it is not simply an unwillingness or inability to lock in the loss that causes people to hang on. The authors employ a survey of 750 investors, and find three main behavioural reasons why people dont list for sale underwater investments

  1. Familiarity bias : this refers to the trait that people “know” their own asset. The investors know their asset, their property, is different. They are too close to it. This bias causes people to overestimate possible returns and underestimate risk.
  2. False Reference : people have locked in the purchase price, and even when they “know” the fair value is much lower they find it impossible to change the reference point to a lower value. Thus they stay at the unrealistically high “frame of mind”
  3. Status Quo Deviation Aversion: it is psychologically costly to change your mind, so people stay the course and refrain from listing at a lower price. After all, prices might rise.

What they dont find is also interesting: the affordability issue is not as important as the (combined) behavioural issues.

All of these of course can be applied not just to individual us property investors : think of NAMA and government policy – we saw the setting of November 2009 as the (false) reference point for prices, we see that the argument of Ireland being fundementally different is still potent, and we see that there is no amount of evidence or argument that will sway the goverenment from its course….

The Psychology Behind Why UnderwaterInvestment Properties Are Not Listed for Sale
Michael J. Seiler, Mark A. Lane, Vicky L. Seiler ,  The Journal of Behavioral Finance & Economics Vol 1 (2)  Spring 2011

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