How long can I sell this property and How much % can it gain?” is the most thoughtless question
With years of working with both individual and professional real estate investors, we have come to the conclusion that no matter how smart, professional and wealthy one is, it is impossible to avoid the very basic trap of mankind: psychological biases, without the right mindset and approach to the real estate market.
“When we think wrong, we are more likely to ask the wrong questions and get the wrong answers. Then that loop continues to reinforce our initial wrong thinking.” Among them, one of the most common misleading questions we observe not only coming from individual real estate investors but also professional ones include:
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After buying this property, how long will the value increase and how much?
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After buying a property then sell it in a year, will the gain be more than the bank saving interest?
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Is there any internal information that makes this property price skyrocket?
Yes, if you think you can control the real estate price fluctuations in the short term, then ignoring this email is such a pity.
First of all, there are three main reasons why the questions regarding to the real estate price above reflect a misleading mindset:
When asking these questions, the investors are expressing themselves unconsciously with those around them:
- They are not aware of their investment strategy (short term or long term). Since then they do not understand what they want and whether the type of person they are seeking for real estate advice is.
- They do not understand their limits: thinking they can understand the price movements of the real estate.
- Finally, they have no control over their reactions and feel insomnia, anxiety, depression, over excitement or excessive regrets because real estate prices fluctuate too much in the short term. As a result, this will lead to the next purchase in a hurry.
Because of this, there are three reasons that we believe the above questions are essentially not necessary:
1/ They cannot distinguish what is the short term motivations or long term motivations of real estate values. Not even aware of our their short term / long term mindset and the respondents:
“In the short term, the market will be voted by the majority. But in the long term, it is always a weighing machine.”
If you are a savvy property investor, you will always know that the short term and long term dynamics of real estate are far different. While short term real estate prices can be affected by a variety of macro and micro economy, crowds and manipulation forces, long term real estate prices always revolve around a very basic rule: “Behind every real estate market is an active economy. And there is only one reason why real estate prices rise: the economy behind grows better, or grows strongly from small scale to large scale.”
Even so, most enter the real estate market perceive it as a place to flip and make short term investments based on a gambling mindset. This mindset may be true in a certain way. When they approach real estate investment with a gambling mindset, they get the right result that a gambler receives: the average result of those short term investment will not be higher than the bank savings. What a zero-sum game, no more or less!
2/ Real estate prices are decided directly by the supply / demand of thousands of different people, the answer is only a hypothesis instead of a correct one:
So, if anyone bragged that there is an answer to the price increase of real estate, it is merely a hypothesis/conspiracy theory/deduction of an individual that you can easily find at any forum or story in a cafe. Somehow, they believe they can read the minds of 10,000 different people to understand their housing needs.
When you ask a question to get an assumption and don’t know whether the answer is correct or not, the question is unnecessary or is just wasting your own time.
3/ The fluctuation of real estate prices does not create any trend or guidance to rely on (ie: buying when the price increases, selling when it decreases):
When the price of the real estate suddenly increases, people often ask why and rush into buying, afraid of missing out something. And when the market is still, the property cannot be sold fast. They are frantic, find all ways to contact the brokers to question the cause, should or should not reduce the price or keep waiting for a better offer.
According to Munger, there is a psychoanalytic super effect, called lollapalooza effect: people are influenced by the crowd (social proof), misunderstanding the cause and the result and then making the wrong decisions because their brains try to clear the doubts to make the call fast, minimizing pain or fear from the price increase (doubt-avoidance tendency). Because of this, we often advise investors not to read unnecessary sensational media channels. When we do a lot of meaningless work, it becomes a bad habit and that bad habit will create conditions for our brain to easily fall into the psychological trap as above.
Imagine you own a plot of land worth about 1 Million USD that you know for sure the price will increase very high up to 1.5-2 Million USD in the next few years thanks to the new infrastructure and the prime location. Assuming the owner of the land on the right decides to sell for 0.9 Million USD due to capital outage and the owner of the plot on the left decides to sell for 0.8 Million USD, will you rush to advertise your lot for 0.8 Million USD or not? Almost all property investors do not act that irrationally. Yet, hearing the news a large corporation collected a few hundred hectares of land in a certain province, causing neighboring landowners to raise the selling price, there will be lots of people rush to buy when price is rising, then feel concerned and stress why cannot sell quickly for a flip.
If you are easily influenced by the price of real estate, trying to find the reason behind the price increase and then shape your investment plan following the upward trend, sooner or later, you will receive disappointing investment results.
What are the short term and long term motivations of real estate price?
At this point, there will probably be some people ask the question: “Why are you so serious to answer such question?” Well, asking such question is nothing serious. But as explained at the beginning: we only ask these questions when we think and approach the market wrongly. When we think wrongly, the more questions we ask, the more we reinforce our wrong thinking.
Thus, you should first list two short term and long term motivations that impact real estate price to understand and synthesize more reasonable and accurate answers:
As you can see, in the short term, there are so many factors that an individual cannot access the data to control, understand and give the right answer, not to mention the two factors that no one can control: the negative / unexpected news of real estate and the irrational crowd effect.
Many times talking to real estate brokers, often they will complain about a paradox when the properties their clients have just purchased cannot liquidate quickly after few months, they will be asked to explain why.
Even worse, when their customers sold the property at a small premium, feeling regret when the price skyrocketed after a few months later, also complain like: “Why at that time the price can only be that much and now it has increased this much?”. When they do not realize their limits and are over confident that they can control everything, if the market goes against their judgment, they will become bitter and waste time on unnecessary questions.
Elsewhere, for real estate investors knowing their own values circle, they will feel comfortable with the fluctuations of the market. They will focus on what they can analyze, including: business activity, economy, future regional infrastructure, population index or macroeconomic indicators of regional economic development. From there, they recognize the patterns that few people can see: economic development will lead to more developed infrastructure; better regional connection will lead more people flocking to the area to work, do business and grow the population; then housing demand will form and increase and real estate prices from cheap will become high. The whole process is slow, cannot be fast. It is impossible to build bridges, roads, industrial parks, schools, hospitals, markets, skyscrapers, trade and administrative buildings or develop economy and increase GPD in few months.
Conclusion: know yourself, ask the right questions:
This email can probably offend some people, but we still want to send it because we believe this is the only way to help people have the right mindset on approaching the real estate market, replace the wrong habits and stop busy dealing with things beyond their capabilities. Instead of asking the misleading questions, they should understand the short term / long term motivations of real estate price and know their limits to approach the market properly.
Ask yourself:
- First of all, ask yourself if you are a short term or a long term property investor.
- If you focus on the long term, are you looking for long term motivations of real estate price, and vice versa?
Ask the right questions:
Sometimes, the liquidity of real estate is a reflection of the supply and demand for essential housing need which is accompanied by the development of that economy. If you are not a short term investor, when the real estate market’s liquidity drops and makes you concerned, you should ask yourselves the following:
- Are there any factors that can change the economic development? Do industries, competitive advantages, politics or trade agreements affect the economy?
- What is the current regional infrastructure? What will be the future infrastructure upgrade and will it improve the traffic situation?
- Is the population on the rise or decline in the next 5 to 10 years?
Try this mindset to answer the following questions:
1/ What will the real estate market in 2020 look like when the Thu Thiem Bridge 2 completed? Which project benefits most from this?
Thu Thiem Bridge 2 construction project has a total length of 1,465m. The length of the bridge is 885.7m, including 6 lanes. The first point of the bridge is at the intersection of Ton Duc Thang – Le Duan, District 1 connecting to the Arc Boulevard (Line 1) in District 2. .
It is expected that by the end of March 2020, the bridge will be connected from Thu Thiem, District 2 to the side of Ba Son area, District 1. The project management board expects the completion remains unchanged, in 12/2020. And according to the research, in addition to the main task of connecting between District 1 and District 2, Thu Thiem Bridge 2 has a cable design with a main 113-meter-high tower bearing as the Dragon Bridge architecture, a symbol of a welcome gate to the city center, Thu Thiem new urban area.
2/ Over the past 10 years, how has the economy developed? And will it be further developed?
Ho Chi Minh City:
Population: 9 million
Urban population: 7.1 million
Number of districts: 19
Total area of districts: 490 km2
GDP 2019: $ 58 billion
Hanoi:
Population: 8 million
Urban population: 3.8 million
Number of districts: 12
Total area of the districts: 300 km2
GDP 2019: $ 42 billion
Difference in Urban Population: Hanoi = 55% HCMC
Total district area: Hanoi = 60% HCMC
GDP 2019: Hanoi = 72% HCMC
3/ Currently, compared with other investment channels such as stock, gold or savings, is real estate more attractive or not?
Over the past several decades, the price chart of real estate in Vietnam has followed a steady upward trend. Specifically, according to the statistics of research units in the past 16 years, real estate prices in Hoan Kiem district, Hanoi have increased 27 times and in District 1, Ho Chi Minh City increased 22 times, while the price of gold only increased more than 5 times. According to experts, the price of housing in Vietnam increased continuously because of the “tradition” of people like to hoard assets. The average Vietnamese people’s savings rate is nearly 50% of their income, double that of most other countries. In particular, a large percentage of savings used to buy real estate and spending on housing leads to very high housing prices.
Mr. Duong Duc Hien – Former Director of Sales Department of Savills Vietnam commented: “The fact proves that, in the past 40 years, real estate prices have not decreased once. Therefore, we can see even during difficult economic times, many projects still have good liquidity. I still recommend investors should only focus on medium or long term investment. Unfortunately, the psychology of Vietnamese investors now still prefer short term investment and forget if they want to earn high profits from real estate, they must invest in the long term.”
Sharing the same view with Mr. Hien, Mr. Le Hoang Chau – Chairman of Ho Chi Minh City Real Estate Association also said that real estate is always a potential investment channel, even in crisis. This was proved during the housing crisis in 2008-2011. Therefore, we can see that although the current covid-19 epidemic affects many economic industries, there is still a wave of real estate investors silently buying land.
Recently, an analysis report from SSI Securities Company (SSI Research) also confirmed that because the real housing demand of people is now so great, house buying and selling activities are still taking place, despite the epidemic situation is complicated, especially in big cities like Hanoi and Ho Chi Minh City.
Ms. Tuyet Minh, an investor in Hanoi, said: “Currently, compared to other investment channels such as stock, gold or savings, real estate is still more attractive. I’m mainly interested in apartments or land plots in rural districts of Hanoi and determine for long term investments of 1-3 years. In my opinion, this is quite safe investment segment at the moment, having both investment value and the asset appreciation, can be leased and used for living.”
Assessing the psychology of investors in the current context, Mr. Su Ngoc Khuong, senior director of Savills Vietnam, said: “It is not because of the market is still that investors are leaving it. The cash flow of investors can be distributed in many places, many different channels. But, for experienced investors in the field of real estate, they will certainly see opportunities in difficulties. Although their way of allocating cash flow will tend to be more secure and safe, putting money into real estate is also the fastest way to increase their asset value. In fact, on the market today, many investors are still quietly searching for real estate in the areas that follow large traffic infrastructure projects, low density, projects with clear legal, designed according to high standards. Although the trading is slower than the previous time, many investors still buy and sell with a quite good profit margin in the current difficult market period.”
The same opinion as Mr. Khuong, Prof. Dang Hung Vo, former deputy minister of the Ministry of Natural Resources and Environment, also pointed: “From a positive perspective, many people will be able to buy houses at reasonable prices in the present time and investors can also easily find potential products. That is also a good point for the market. Or in the words Warren Buffett: We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
4/ Is Covid-19 an opportunity to rethink?
The Covid-19 epidemic is raging throughout the world, causing Vietnam and other countries to strain themselves against it. In an effort to repel the Covid-19 epidemic, Vietnam has been highly appreciated by many countries around the world. Even the World Health Organization, WHO also called on countries to consult how Vietnam is fighting the epidemic.
In particular, the wave of oversea Vietnamese coming back to Vietnam has increased sharply. The amount of inward remittance from overseas Vietnamese is estimated at US $ 16.7 billion in 2019, a slight increase of 4.6% compared to the previous year, according to the World Bank’s forecast.
Accordingly, this year may be the third consecutive year that Vietnam is among the top 10 countries receiving inward remittance from its own oversea citizens in the world. It can be seen that Vietnam’s anti-epidemic efforts are proving Vietnam is a safe, worth living and attractive destination to invest.
After the Covid-19 epidemic, it is likely that the wave of investment to Vietnam will increase sharply, especially in the real estate sector, said Le Hoang Chau, president of Ho Chi Minh City Real Estate Association. Also according to Mr. Chau, at present, under the impact of epidemic diseases, the real estate market is like a compression, just waiting for the time to bounce up strongly. The psychology of customers and investors is falling due to the psychological effects from the epidemic. Once the epidemic is well controlled, the market will simultaneously welcome strong demand from both of them. After the epidemic ends, there will be a new wave of real estate investment from overseas Vietnamese as the number of people coming back to Vietnam to avoid the epidemic is increasing. Nearly 5 million oversea Vietnamese is extremely huge for the real estate market. We can see the amount of inward remittance in a year officially about 15 billion USD, by unofficial channels is also the same.
In addition, Mr. Chau also said if Vietnam continues to control the current epidemic well and overcome the disease, it will be a bright spot for the economy to attract foreigners to invest, live and work. This will be a huge source of demand for the real estate market in the near future.
According to Stefan Aarnio’s book, Hard Times Create Strong Man, there is a line: “Hard times create strong men. Strong men create good times. Good times create weak men. And, weak men create hard times.” Such an interesting loop. In these days, are we in a hard or good time, and are we going to be strong or weak?
Remember: “Behind every real estate market is an active economy. And there is only one reason why real estate prices rise: the economy behind grows better, or grows strongly from small scale to large scale.” If the economy is developing well, there is no reason the real estate prices cannot increase.
Therefore, those who try to forget this philosophy, gamble with real estate and buy short term flipping will surely get disappointing results. Investors who understand it correctly will be extremely calm before every change of the market. Since then, they not only enjoy the investment process, but also receive a steady and long term gain.
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