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Psychological Factors That Affect Decision-Making of Property Investors

From the early days of marketing, experts have always been interested in what drives consumers’ purchasing decisions. What makes people buy the way they do? What makes people buy a product and then immediately regret their decision? Why do some purchases seem to occur more at certain times of the day?

By answering these questions, Zbranek & Holt Custom Homes, an award winning Custom Home Builders in Westlake, Texas believe that they can help improve customer satisfaction levels and reduce the cognitive dissonance created by their messages in order to deliver marketing that hits the sweet psychological spot.

In this article we will discuss the psychology of decision-making in property purchases. I’ll lead you through some psychological principles and how they affect decision-making. You might well come away from the article with as many questions as you have answers. Unfortunately, that’s sometimes the nature of studying topics in the field psychology.

Let’s start with the nature of the property market. Perhaps the biggest investment a person will make in their lifetime is a property purchase, either residential or commercial. The decision is always a big one because it’s not just a financial investment—it’s an emotional investment too.

In marketing psychology, buying can be categorized into low involvement and high involvement decision-making. It’s almost impossible to discuss a consumer’s buying behavior without accessing the level of involvement in the particular product. This refers to a customer’s degree of information processing and importance attached to a product prior to purchase.

  • Low involvement decision-making

This is decision-making involving products that are low risk or generally inexpensive. The information processing demands and level of attachment to such buying decisions are usually low. Think groceries or everyday household items like toilet paper.

  • High involvement decision-making

Products in this category are usually very high risk and expensive. The information processing involved is extensive and thorough and the level of attachment is high. Buyers in this category research carefully before making any kind of commitment.

When it comes to property purchase/investment, the buying decision is definitely a high-involvement one. It requires deep insight and high-level research, knowledge of the market and a sizable amount of capital. All these factors contribute to the buyer’s mindset when they consider investing in a piece of land or a property.

There’s no doubt that property acquisition is an emotional buying decision. As social animals, concerns about social status are a high priority. Do we really want to buy the rundown auction property or would we rather buy new? We are emotionally tied to the things that we own and we are therefore attracted to possessions that add to our psychological wealth, not just our monetary wealth.

The following psychological factors are some of the most salient when it comes to property investment decisions.

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Uncertainty about the future

This could also be called “fear”. Fear is a primitive brain function that overrides almost every other brain process. Fear tends to cause people to freeze—and it’s no different in the property investment arena. What’s the best breeding ground for fear? Uncertainty. A good example is the market performance since British Prime Minister Theresa May announced the triggering of article 50 on March 29th, 2017. Ever since, the number of people moving home has dropped. Beginning with the announcement of the Brexit polls, we have seen a 9% drop from the same time in 2015.

In terms of price of housing, London was most affected as the initial boom cooled off immediately due to a price decline. Property investors are currently halting their purchases to study the direction of the market post-Brexit.

Fear of market instability can therefore be listed as an important psychological factor in property decision-making.

Scarcity mentality

In psychology, this is a common concept much like that of economics. In this situation, buyers tend to place a higher value of properties that are scarce, while they place a lower value on those that are abundant. For instance, if there is a limited number of housing units for sale in Kensington, there is likely to be a rush for the remaining properties.

In some cases, buyers show a reduced price-sensitivity because they are more interested in acquiring that property at the moment. Scarcity affects cognitive resource, which is the allocation of our limited information processing abilities. It’s for this reason some marketers create a “Hurry Now!” sense of urgency.

Conversely, when there’s an abundance of properties (increased supply), people are less driven to buy. This can affect the price, driving it upwards.

Emotional involvement

Emotional involvement is also an important aspect of property purchase. When people have an emotional attachment to a piece of property, it can cloud their bias towards making a cognitive decision. If a person grew up in an apartment complex or enjoyed drinking coffee at a café, they might make efforts to acquire it for the nostalgic and emotional resonance.

There are many stories of individuals and communities raising money to prevent their beloved pub or store from being acquired by corporate estate developers. It’s this type of emotional attachment that inspires certain buying decisions.

Herd mentality

It’s impossible to discuss property buying decisions without mentioning the effect of herd mentality. In psychology, this concept describes the power of social influence. It’s the same reason people would rather join a long line at a queue even when there is a short line available. Surely, all the other people can’t be wrong?

Herd mentality often occurs when people don’t have a strong individual opinion about the choices available to them. According to this study by Young Eun Huh at el, rather than asking questions or taking time to learn about the product, people turned to “social default”.

In property investment, the same occurs to some extent. Property investors who don’t want to spend money or research or a professional agency rely on investment decisions of the public.

However, this is an ill-advised thing to do seeing as there are various types of investors:

  • Wealth investors
  • Prestige investors
  • Empire builders
  • Lifestyle investors

Each type of investor is doing so for their own reasons. It would therefore be wrong for a wealth investor to make buying decisions because a number of lifestyle investors are doing the same.

Even first-time buyers have different motivations for their purchase decisions and this must be taken into account by any property investor.

Property acquisition is ideally a high-involvement buying decision. It not only requires significant research and information processing, but substantial purchasing power. As psychology remains a key part of human behavior, we can’t afford to ignore its influences in our purchase behavior.